BNP Paribas Investment Partners is allocating funds to Southeast Asia as the yen weakens, betting Indonesia and the Philippines will gain from lower import costs.
Indonesia, which suffered a record current-account deficit last year, imported $17.3 billion of goods from Japan in the first nine months of 2012, almost four times the full-year total 10 years earlier, statistics office data show. The rupiah’s 19 percent rally against the yen in the past six months cut the cost of purchases. Around 12 percent of Indonesian imports and 9 percent of those in the Philippines came from Japan, according to official data.
The performance of Asian currencies, stocks and bonds has diverged this year as the yen’s slump burnished the finances of Southeast Asian countries, while putting pressure on South Korea and China, which compete with Japan in autos and electronics. BNP’s Fischer Francis Trees & Watts unit, which manages $59 billion, holds more Indonesian and Philippine assets than the weighting in the benchmark against which it tracks performance.
“When you look at the Philippines and Indonesia, they actually import a great deal from Japan,” John Morton, FFTW’s Boston-based head of emerging markets, said in an interview in Hong Kong this month. “That will be a positive for their current accounts.”
Bank of Japan’s loose monetary policy aimed at ending the nation’s persistent deflation has driven a 17 percent plunge in the yen to 94 per dollar in the past six months. The median estimate of economists surveyed by Bloomberg is for the currency to weaken to 97 by year-end, while Skandinaviska Enskilda Banken AB said the yen could plunge to 110 as investors under-estimate how much new Governor Haruhiko Kuroda will ease, according to a March 27 research note.
The 10-year benchmark government bonds of Indonesia, rated investment grade by Moody’s Investors Service and Fitch Ratings, yield 5.49 percent, compared with 3.53 percent in the Philippines, 3.46 percent in Malaysia and 3.48 percent in Thailand. The rupiah has dropped 5.7 percent against the dollar in the past year, while consumer-price gains in Southeast Asia’s largest economy accelerated to a 20-month high of 5.31 percent in February, official data show.
“In Indonesia’s case, we feel as though even with the inflation trend and moderate currency depreciation, we are still earning an attractive return relative to other countries,” FFTW’s Morton said.
The Philippines received its first investment-grade ranking this week, when Fitch raised it one level to BBB- on March 27. Standard & Poor’s and Moody’s rate the country at the highest junk level. The yield on the nation’s 9.5 percent dollar bond due 2030 dropped three basis points to 4.18 percent on the day of the upgrade and has declined 50 basis points in the past year, according to data compiled by Bloomberg.
FFTW’s Morton said he preferred sovereign dollar debt from the Philippines and he also looks at some corporate notes from the nation denominated in the greenback.
Of the major Southeast Asian currencies, Thailand’s baht has been the biggest beneficiary of the weakening yen, gaining 27 percent against it in six months. The Philippine peso has advanced 23 percent, while Malaysia’s ringgit and the Singapore dollar rallied 19 percent.
Japan is Thailand’s biggest foreign investor, with companies including Toyota Motor Corp., Hitachi Ltd. and Canon Inc. having manufacturing bases in the Southeast Asian nation, taking advantage of the lower production costs. A weaker yen may slow or halt the process of Thai production displacing Japan’s and could impact the foreign direct investment flows into Thailand, Lewis Jones, an emerging-market debt portfolio manager at FFTW in Boston, wrote in e-mailed comments on March 27.
“We don’t hold any Thai baht in the portfolio at present and have a market-weight on the ringgit,” FFTW’s Morton said.
The BNP Paribas L1 - Bond World Emerging Fund has posted a 0.62 percent loss this year, beating 33 percent of its peers, after a 3.44 percent gain in 2012, according to data compiled by Bloomberg. Morton has been managing the fund for six months after joining BNP Paribas from Rexiter Capital Management, a subsidiary of State Street Global Advisors.
Indonesia’s current-account shortfall was $24.2 billion last year and foreign-exchange reserves fell $7.6 billion in the first two months of 2013 to a two-year low of $105.2 billion, official data show. Overseas investors held 33 percent of Indonesia’s local-currency debt as of March 26, near a record-high 34 percent recorded in February, finance ministry data show.
Five-year credit-default swaps on Indonesia’s debt rose 28 basis points this quarter to 164 basis points on March 28, the highest since Sept. 5, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
“We’re cautious on Indonesia,” said Natasha Smirnova, the London-based vice president for emerging-market fixed income at PineBridge Investments, which oversees about $72 billion worldwide. “When you have a widening current-account deficit and inflation creeping up, typically you become vulnerable to outflows from the local-currency market.”
The Federal Reserve should continue its bond-buying program through the end of 2013, Boston Fed President Eric Rosengren and Chicago Fed President Charles Evans said this week. The so-called quantitative easing has increased investment flows into higher-yielding developing-nation assets. FFTW’s fund dedicated to emerging markets has been taking in about $75 million to $100 million of fresh money each week, according to Morton.
“For us, Asia is our safe-haven investment most of the time,” he said. “In the past few years, we’ve been reallocating money out of emerging Europe and redeploying it in Asia, primarily in Indonesia and the Philippines.”