Schroder Investment Management Ltd. said it favors South Korean company bonds and expects a “quite good” year for Asian debt as regional currencies appreciate.
The extra yield investors demand to own Asian dollar-denominated bonds instead of Treasuries has narrowed 31 basis points to 347 basis points since Jan. 25, when the Federal Reserve signaled plans to keep U.S. interest rates at near-zero levels through 2014, an HSBC Holdings Plc index shows. All of Asia’s 10 most-used currencies excluding the yen have strengthened this year, with the won advancing 2.5 percent.
“Korean corporates are at the top of my mind,” Rajeev De Mello, the Singapore-based head of Asian fixed-income assets at Schroder, said in a Feb. 17 interview. “They still have wide spreads and will remain attractive. The outlook for Asian currencies is still good. We are seeing inflows and that will continue.”
The region’s developing economies may expand 7.3 percent this year, compared with 1.8 percent growth in the U.S. and a contraction of 0.5 percent in the euro area, according to estimates released last month by the International Monetary Fund. Emerging-market bond funds saw record inflows of $2.1 billion in the first week of February, data from Cambridge, Massachusetts-based research firm EPFR Global showed. The funds have attracted $3.8 billion in 2012, up 41 percent from the year-earlier period.
Local-currency bonds in Asia’s 10 largest economies excluding Japan handed investors a return of 4.3 percent in dollar terms this year, while the region’s dollar-denominated notes gained 2.2 percent, according to an index compiled by HSBC Holdings Plc. Treasuries lost 0.5 percent, Bank of America Merrill Lynch data show.
Investors including pension funds are allocating money “from zero-yield areas to higher-yielding regions,” said De Mello, who works for a unit of the 200-year-old London-based Schroders Plc.
The company’s $1.1 billion Asian Bond Absolute Return fund is targeting a gain of as much as 9 percent this year, said De Mello, who moved from Western Asset Management Co. in July. It has returned 2.4 percent so far in 2012, beating 64 percent of its peers, according to data compiled by Bloomberg. As of end-January, 19 percent of its assets were in Korean securities, followed by 12 percent in Malaysia.
De Mello, 45, said the won, Malaysia’s ringgit and the Singapore dollar are among his favorite currencies this year. The fund manager said he recently reduced holdings of rupee-denominated assets because the Indian currency’s rally was “too fast” given the nation’s “huge” current-account deficit and the prospect of interest-rate cuts in the second quarter.
India’s current-account shortfall has increased every year since 2007, surging almost fivefold to $44.4 billion last year from $9.8 billion four years ago, official data show. The rupee has led gains among emerging-market Asian currencies this year, rising 7.7 percent against the dollar. The ringgit is the next best, with a 5 percent advance, followed by the Singapore dollar, which has strengthened 3.4 percent.
De Mello said he expects “selective” Chinese property bonds to offer good returns and that he’s “interested” in Hong Kong’s offshore yuan bond market, which is likely to be “very good.”
The average yield on Dim Sum bonds dropped 78 basis points this year to 5.17 percent, after rising 157 basis points in the second half of 2011, according to Bank of China (Hong Kong) Ltd. data. Higher yields, combined with growing issuance, are attracting more global investors and the prospect of a stronger yuan has spurred buying of the securities, De Mello said.
China’s gross domestic product increased 8.9 percent in the fourth quarter from a year earlier, the smallest increase since 2009, official data show. The yuan is little changed against the dollar this year after rallying 4.7 percent in 2011.
“The market has developed enough that it’s now more of a bond story than just a currency story,” De Mello said. “We had a moderate economic slowdown last quarter in China, following the excessive negativism at the end of last year. We will have a recovery in the first and second quarters and that should be good for corporate bonds.”
Asian economies have proven “generally resilient” to turbulence in global markets stemming from Europe’s debt crisis and most have scope to boost spending and cut borrowing costs if that proves necessary, Anoop Singh, the IMF’s Asia-Pacific department chief, said Jan. 31. An upbeat growth outlook and sound public finances are drawing funds from investors seeking diversification and higher returns, De Mello said.
“Asia does offer higher returns in terms of yields that will attract inflows,” he said. “Asian countries have smaller deficits and their total debt-to-gross-domestic-product ratios are lower than the U.S., Japan and most countries in Europe.”