Even a Bond Rout Can't Scare Investors Away From IndonesiaBy and
Aberdeen, Western Asset bought rupiah bonds in recent selloff
High yields, economic reforms endear India, Indonesia to funds
As local-currency bonds in Indonesia joined the recent global debt selloff, Aberdeen Asset Management Plc and Western Asset Management Co. had a simple strategy: buy more.
The money managers see the nation’s securities, along with India’s, as the best bets to weather any selloff in emerging Asia as the European Central Bank prepares to join the Federal Reserve in paring stimulus. Eaton Vance Corp. is on board too, favoring rupiah and rupee bonds for high yields and a positive outlook for the two economies. First State Investments recently sold the notes at a profit, and is waiting for better levels to buy back in the fourth quarter.
“I really don’t think the gradual balance-sheet reduction by either the Fed or ECB will cause much market dislocation over the medium term as it will indeed remain a very gradual process,” said Edwin Gutierrez, London-based head of EM sovereign debt at Aberdeen Asset, which oversaw $385 billion as of March. “We’ve already taken the other side by adding to our Indonesia local position. Should the selloff persist, I think we would consider buying even more.”
An improvement in economic fundamentals since the 2013 taper tantrum and yields that are more than three times those on U.S. Treasuries have made India and Indonesia the darlings of investors. Recent declines in their bonds, spurred by the prospect of higher developed world interest rates, have proved to be an aberration and foreign funds are already returning to the two markets, which have lured more than $18 billion this year.
India’s case has been bolstered by government reforms -- including the implementation of a national tax and opening up of various sectors to foreign direct investments -- which are seen underpinning the $2.26 trillion economy, one of the world’s fastest-growing. For Indonesia, a rating upgrade by S&P Global Ratings has boosted sentiment for investors impressed by its success in overhauling taxes, cutting red tape and raising infrastructure spending.
“The fundamentals of both India and Indonesia are much improved since 2013 and we are actually long both of those countries’ bond markets,” said Eric Stein, Boston-based co-director of global fixed income at Eaton Vance, which oversees $393 billion. “Most Asian countries have fairly strong balance of payments positions right now, so currency volatility should be reasonably contained.”
Overseas funds have poured the equivalent of $11.1 billion into rupee sovereign bonds this year, with the securities returning 3.6 percent in 2017, an index compiled by Bloomberg show. Investors have earned 9.2 percent on rupiah notes, which have drawn in $7.4 billion in foreign flows.
Indonesia’s appeal seems to be extending beyond local-currency debt. The nation sold 1 billion euros ($1.15 billion) of seven-year bonds on July 11 at a yield of 2.178 percent, or 27 basis points below the initial price guidance.
Here is a selection of the managers’ views on bonds:
- Desmond Soon, head of investment management for Asia at Western Asset, which oversees $433 billion:
- Overweight India and Indonesia sovereign & quasi-sovereign bonds in local currency markets; favors Asian dollar investment-grade credits
- Says no large Asian central bank has followed the Fed during hike cycle; Asia inflation subdued, GDP below potential, external positions & currencies robust
- A large scale Korean military conflict is a “known unknown” that would have widespread, immeasurable impact on Asia’s local-currency bonds
- Nigel Foo, senior bond fund manager at First State Investments:
- Foo sold all his positions in Indonesia and India local-currency bonds toward end-May, profiting from rally since late last year
- Gutierrez, Aberdeen Asset:
- EM debt selloff looks a bit stretched, largely ETF-flow driven, spooked by rout in core bond markets, he says
- Stein, Eaton Vance
- Says a faster Fed taper could cause bond markets to sell off
- Eaton Vance Global Macro Absolute Return Fund is long bonds in India, Indonesia, Australia, New Zealand; has short positions in Japan, Korean rates that could help mitigate losses in event of selloff in U.S., global rates
- Indonesia’s bonds should hold up amid rout because nation’s macro fundamentals, policy making now more market supportive; prior unwinding of positions started from very rich levels
- Ezra Nazula, head of fixed income at PT Manulife Aset Manajemen Indonesia in Jakarta:
- Once yield expectation in Europe and the U.S. stabilizes, investors will again look at fundamentals; Indonesia’s story is still strong
- Local bond yields will find equilibrium; given inflation around 4 percent, attractiveness of rupiah bonds is high at above 7 percent
- Favors the longer tenor of the curve, specifically 15-year and 20-year debt