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Finding value in Asia

Finding value in Asia

The world’s moved on but fixed income allocation has not

Our long-held view is that the world is far more complex than the homogenised emerging and developed-market categories investors often allocate towards.

Asia is perhaps the region which most characterises how far so-called emerging markets have come since the end of the last century. We believe that outmoded ideas mean investors are missing out on some of the best structural investments in the market, in fact, they are systematically underweight Asia despite its economic size and future prospects.

In part, this is the result of the region’s underrepresentation in benchmark indices but equally because of the simplistic nature of asset allocation in fixed income. Regional fundamentals in Asia are strong and getting stronger, and investors might want to reassess whether their regional exposure needs a boost.

Investors often think about equity allocations at a regional or even a country level, not only in developed but also in emerging markets. This happens to a lesser extent in fixed income, and since emerging markets are considered high risk, high return investment strategies, there is often limited incentive for managers to seek returns in lower-risk economies.

Markets are structurally underweight Asia

Equally, Asia is still labelled emerging and not included in portfolios; and owing to the lower debt ratio, represents a limited amount of global benchmark indices. Indeed relative to its contribution to world GDP of 24%, the 6% benchmark neutral allocation afforded in the benchmark looks meagre.

Investors should consider Asia as a standalone allocation because traditional benchmarks simply do not do it justice. It is clear that the region’s economic fundamentals trump those in other parts of the world.

Current accounts surpluses, better-than-average growth, and low debt-to-GDP levels are one thing, but the region’s strong net foreign assets position is another reason to feel the region has moved past characteristic emerging-market concerns including excessive reliance on foreign capital.

Structurally, a burgeoning middle class, with its demand for savings and financial products, has created a market that is no longer reliant on foreign lenders. We believe these strengths provide tailwinds for both local and hard currency markets and warrant greater investment than we see currently.

Risk adjusted yields look more attractive in Asia

Markets provide a rich opportunity set

The Asian economy has also grown in recent years, and many issuers now have established curves, and with sizeable issuance, bonds remain liquid.

Valuations, despite equivalent or superior ratings to most developed markets, continue to trade wide of US and European peers. From a local perspective, interest rate policy remains more traditional, and in many respects more predictable than developed markets.

Much like in Europe, the economies are diverse, providing a real range and breadth of opportunity for investors in local bonds. This breadth allows active managers to capitalise on variations in the macro cycle as well as tactical and structural themes related to the diversity of economics, politics and development. Combing both local and hard currency bonds helps us exploit the different stories in the region.

We believe that not only do structural economic fundamentals and market forces represent compelling reason to invest in Asia on a macro basis, but that valuations also provide a rich opportunity set for superior returns compared with many more expensive and challenged developed markets.

Links to fund pages

Further reading

For more information on the relationship between duration and relative value, read our whitepaper A Theory of Relativity.

Part of the Bonhill Group.