South Korean and Malaysian bonds offer a “safe haven” as concern Greece’s debt crisis will spread erodes demand for riskier assets, according to DBS Asset Management Ltd., a unit of Southeast Asia’s largest lender.
South Korea’s local-currency government bonds have handed investors a return of 0.7 percent this quarter and Malaysia’s gained 0.8 percent, according to indexes compiled by HSBC Holdings Plc. JPMorgan’s GBI-EM Global Diversified Index, which tracks developing nations’ domestic debt, has lost 3.5 percent and MSCI’s emerging-markets stock index is down 8.2 percent.
The securities should prove robust as they are primarily held by domestic investors, who will top up their holdings as global equities slump, said Desmond Soon, vice president for fixed income at DBS Asset in Singapore. Asia’s government bonds should be supported by low debt levels and expanding economies, William Hess, director of sovereign ratings for the region at Standard & Poor’s, said this week in Tashkent, Uzbekistan.
“The contagion has spread to Spain and Portugal because of their weaker economies,” said Soon, who helps oversee $22 billion. “If there’s a severe correction in the market, you should buy into fundamentally sound countries. Quite a few Asian countries are in that space.”
Yields to Decline
South Korea’s 10-year benchmark bond yields may fall to 4.5 percent by the end of the year and Malaysia’s may decline to 3.75 percent, Soon predicted. If his forecasts prove accurate, Korean bonds would have returned 6.6 percent and Malaysia 4.9 percent in the period, according to data compiled by Bloomberg.
The yield on Korea’s 5.75 percent note due September 2018 was at a two-week high of 4.93 percent as of 4:09 p.m. in Seoul, 47 basis points less than at the start of this year, according to the Korea Stock Exchange. The yield on Malaysia’s 4.378 percent bond maturing November 2019 has declined 18 basis points to 4.07 percent. A basis point is 0.01 percentage point.
Asia is leading a global economic recovery and has built record foreign-exchange reserves to avoid a repeat of the region’s 1997-1998 financial crisis. The region, which spent the last 10 years paying its debt, should “weather the storm with relative ease,” DBS Group Holdings Ltd. said in a research note to clients on May 5.
South Korea’s budget deficit totaled 4.1 percent of gross domestic product in 2009, Malaysia’s shortfall reached a 22-year high of 7 percent and Indonesia’s was 1.6 percent. That compares with 13.6 percent for Greece, 11.2 percent for Spain and 9.4 percent for Portugal. South Korea’s credit rating was raised in April by Moody’s Investors Service, while Standard & Poor’s last week downgraded the European nations, slashing Greece to junk.
Asia’s developing economies will expand 8.7 percent this year, outpacing growth of 1 percent in the 16-nation euro region and 3.1 percent in the U.S., according to International Monetary Fund estimates published April 21.
About 90 percent of South Korea’s government bonds are owned by domestic investors, according to the Financial Supervisory Service. In Malaysia, the proportion is 87 percent, central bank data show.
“They are actually safe-haven products,” Soon said. “There is more domestic buying of local-currency bonds when things are bad.”
Indonesian bonds will remain a “core position” in DBS Asset’s portfolio, Soon said. However, “in a risk aversion environment, Indonesia is one where you don’t want to have a big position because foreign holdings are substantial.”
Overseas investors held 24.5 percent of the nation’s local-currency government debt at the end of April, official figures show. The securities have delivered returns of 8 percent this year and 22 percent in 2009, according to an HSBC index. Those are the best performances among Asia’s 10 biggest economies excluding Japan.