Pimco Favors Asian High-Grade Debt as Low U.S. Rates Persist
Pacific Investment Management Co., which runs the world’s biggest bond fund, sees value in high-grade notes sold by Asian companies as low U.S. interest rates persist.
Five-year bonds yielding about 3 percent and rated BBB, the lowest tier of investment-grade securities, are “attractive investments,” according to Ramin Toloui, the money manager’s Singapore-based global co-head of emerging markets portfolio management. Interest rates are likely to stay low for the next couple of years, he said.
The region’s issuers sold $38.8 billion of U.S. dollar-denominated bonds rated BBB or the equivalent by any of the three major risk assessors this year, 32 percent of total sales in the currency, data compiled by Bloomberg show. Asian companies’ dollar debt has lost 0.6 percent this month, underperforming global corporates, which lost 0.4 percent, according to Bank of America Merrill Lynch indexes. Securities with BBB ratings performed even worse, losing 0.9 percent, the indexes show.
“One of the most straightforward ways of taking advantage of this low-yielding environment is buying high-quality bonds that are short dated,” Toloui said in an interview in Hong Kong last week. Buying high-yield debt, “it’s more difficult to find value and find places where you’re getting appropriately compensated for the inherent risks.”
Securities sold by Kasikornbank Pcl, a Thai lender graded BBB+ by Standard & Poor’s, traded as high as 104.4 cents on the dollar this year before falling to 97.7 cents on June 26, following indications a week earlier the U.S. Federal Reserve planned to start winding back its unprecedented stimulus program. The $500 million of 3 percent 2018 notes were trading at 101 cents on the dollar as of 1:10 p.m. in Hong Kong, Bloomberg-compiled prices show.
Investors pulled $1.83 billion out of emerging-market bonds in the week to Nov. 13, with $325 million exiting positions in Asia’s developing economies, Australia & New Zealand Banking Group Ltd. wrote in a note last week, citing EPFR Global data.
Funds flowed out of the region after the U.S reported better-than-expected non-farm payroll figures, increasing the likelihood that the country’s central bank will taper bond purchases as soon as December, according to ANZ.
Emerging-market bonds are however still supported by the longer-term rebalancing of portfolios away from established economies, Pimco’s Toloui said. “The short-term reaction to Fed policy is certainly the critical driver of asset prices in the near term, but it’s not the only driver over a longer period of time,” he said.
Developing countries expanded 5 percent last year, more than 3.5 times the pace of growth in advanced economies, according to the International Monetary Fund. Emerging Asian economies grew by 6.8 percent. In 1998, developed markets grew 2.3 percent versus 1.9 percent for emerging nations across the world.
Investors in the U.S. allocate just 1.7 percent of their portfolios to emerging-market debt, Steven Nicholls, head of Aberdeen Asset Management Plc’s fixed-income product specialist team said at a briefing in Hong Kong earlier this month.
Asia is predicted to grow 6.4 percent this year, even as China endures its longest streak of sub-8 percent growth in at least two decades, according to economist forecasts compiled by Bloomberg. That compares with a 1.1 percent expansion expected for G-10 currency economies.
“Our approach is to have views on the global macroeconomic context, regional macroeconomic context and national macroeconomic context, and within that to identify credits in sectors likely to do well,” said Toloui. “They need to have strong corporate governance, a strong business model and compensate you for the set of risks you’re taking.”
Dollar debt from Asian companies rated BBB yields an average 4.27 percent, 62 basis points less than international notes sold by Latin American corporates, Bank of America Merrill Lynch indexes show. U.S. currency notes from Chinese companies yield 5.83 percent, the data show.
China’s Communist Party leadership concluded meetings last week to outline social and economic reform. While markets will be “decisive” in allocating resources, the state will continue to be “dominant” in the economy, according to a communique from the sessions.
Pledges listed in a 60-point document published three days after the meeting, known as the third plenum, included establishing market-determined prices for resources and boosting private-sector and foreign investment. The party listed fiscal and tax reform as the fifth out of 16 main points in its document.
Money-market rates and onshore bond yields in the world’s second-largest economy have soared as investors speculate the government will loosen its grip on interest rates. The benchmark seven-day repurchase rate rose to 5.4 percent today, the most since it climbed to a four-month high on Oct. 30. The yield premium on three-year corporate bonds in China surged to an almost 10-month high last week.
“Given the ample financial resources China’s government has at its disposal, it’s certainly not about categorically avoiding China,” said Toloui. “It’s about factoring that risk as something that the spread has to compensate you for. That might guide you toward companies that have strong levels of support -- including sovereign support -- that you think could serve as a backstop during periods of volatility.”
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