ASIA - Asian debt is replacing US Treasuries for institutional investors in the region, but developed market pension funds remain underexposed to the asset class, Baring Asset Management believes.
Barings said Asian debt and currencies can provide some of the best absolute and risk-adjusted returns compared with US and other global fixed income sectors.
While global debt investors are increasingly shifting their structural allocations to Asian debt as economies in the region continue to strengthen, developed market pension funds remain under-invested in the asset class, the asset manager said.
"Asian debt, both local government and US dollar corporate, has been less volatile than emerging market debt and this stability has enabled the sector to deliver superior risk-adjusted returns in comparison to some other asset classes," Barings head of Asian debt Thomas Kwan said. "We believe that the Asian bond market continues to offer attractive risk-adjusted returns for investors and we expect currency appreciation to be an important source of outperformance.
"Despite recent inflows, Asian debt remains underinvested. Most developed market pension funds have limited exposure to this asset class and with assets under management totalling around $16tn, even a small increase in allocation will lead to a marked increase in future inflows. We expect this to be further supported by the gradual relaxation of investment restrictions in China and India. With credit quality improving and volatility continuing to decline and converge towards global bond markets, Asian bonds are increasingly assuming the former role of US Treasuries in the asset allocation of institutional investors across Asia."
The manager also believes Asian debt offers a gateway to the Chinese economy, as Chinese issuers have become dominant players in the Asian debt markets, especially in the high yield space. Barings considers high yield Chinese bonds attractive compared to global and regional peers as they carry shorter durations but provide higher yields. There has been a rapid growth in offshore Chinese (CNH) bond issuance, with the total outstanding amount of CNH bonds reached RMB 101bn as of end-April - a 58% increase from the end of last year.
Kwan added: "With Asian FX supported by strong economic fundamentals, including higher economic growth, high interest rates, better external balances and strong capital flows to Asia, the appreciation trend is firmly anchored and this will remain an important driver of future performance."
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