Asian Bond Rally's Fate Splits Investors After Flows Surge

Updated on
  • Flows into emerging debt rose to most since 2014 last quarter
  • Mitsubishi UFJ is also bullish while Aberdeen is taking profit

Asian emerging-market bonds lured the most cash in more than two years last quarter. Now, the trade is splitting investors -- with some betting the easy money has been made.

There’s the optimists like Pioneer Investment Management Ltd. and Mitsubishi UFJ Kokusai Asset Management Co., which are looking to add to their holdings of Asian developing-nation debt on bets the global economic recovery will fuel further bullishness. Then there’s the bears: Aberdeen Asset Management Plc and HSBC Global Asset Management Ltd. say the bond rally propelled by expectations for an uptick in U.S. growth has outstayed its welcome.

“We still think the reflation trade is on,” said Hakan Aksoy, who helps manage about $241 billion, including investments in emerging markets, at Pioneer in London. “There could be some further political shocks to the global markets such as the elections in France and Germany, or trade relations between countries, but we believe this could be a buying opportunity.”

Read more: The profitable positions that could turn on a dime this quarter.

Mitsubishi UFJ is banking on Donald Trump. While the president’s health-care bill failed to pass, it’s still too early to write off his promised reforms, says Hideo Shimomura, chief fund manager in Tokyo at the investment trust provider, which oversees about $112 billion. He particularly likes Malaysian debt, which saw outflows in the four months to the end of February.

“We have seen expectations of a global economic recovery, stability in the Chinese economy, hopes for Trump’s policies and improving risk sentiment,” Shimomura said. “If there is any correction downward for emerging-market assets, we may consider adding them to our portfolios.”

Foreign investors plowed almost triple the amount of money in to debt of South Korea, India, Indonesia and Thailand in the first quarter as they did in to the bonds of Mexico, Turkey and South Africa combined, according to data compiled by Bloomberg.

Trump’s vow to revamp the U.S. tax system and ramp up infrastructure spending saw money managers gravitate toward risk assets, with Asian currencies recording their best quarter since 2010 and regional bond yields dropping to multi-month lows. But a pullback in commodity prices and stumbles in Trump’s agenda have some heavy hitters calling time on the reflation trade.

HSBC Global Asset Management is in that camp. The firm, which oversees about $413 billion, is locking in profits on Indonesian debt after the country’s 10-year bond yield plunged 93 basis points in the first quarter, the most in a year. They’re maintaining an underweight position in Thailand and Malaysia. Yields on Indonesian notes have climbed this week, while rates on South Korean, Malaysian and Thai securities have dropped.

“U.S. rates are likely to be in a range constrained by economic fundamentals,” said Binqi Liu, a London-based portfolio manager at HSBC. “We have always been relatively cautious on the optimism priced by the market regarding the economic impact of possible U.S. tax cuts.”

“Fiscal stimulus will take time to realize,” she said.

Aberdeen Asset Management is reducing its position in Indonesian bonds, but remains overweight on the debt, says Edwin Gutierrez, the firm’s chief of emerging-market sovereign debt in London.

“We don’t think the reflation trade is dead, but arguably some risk assets were already priced for perfection,” said Gutierrez who helps to oversee Aberdeen’s $374 billion under management. “We’ve taken profits into the rally.”

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