The investment case for allocation towards Asian debt hard currency (HC) bonds is a compelling one, believes Joep Huntjens, head of Asian Debt at NN Investment Partners (NN IP). However, international investors remain underinvested in the fast growing region which has a share of global GDP of more than 35%.
With the market capitalisation of the asset class approaching $1trn, the growing and maturing asset class of Asian debt provides increasing opportunities for investment and diversification. Following the recent increase in the yield of the asset class, Huntjens expects a total return in the next 12 months of 4.5-5.0% in USD terms.
Asian credit is also less prone to changes in international sentiment with most new issuance absorbed by local Asian investors who are more home-biased and loyal to the asset class. Although markets were volatile in the first quarter of 2018, owing to concerns about US inflation and a trade war between the US and China, Asian credit was fairly resilient. The market fell by less (-1.37%) than the emerging market hard currency sovereign bond market (-1.78%) and US investment-grade bonds (-2.32%) in the first three months of the year.
This was partly because Asian debt has a lower interest rate sensitivity than the other asset classes. In addition, Huntjens is less concerned about the potential of a trade war between the US and China for three reasons: “First, China’s reliance on exports has fallen sharply to 20% of GDP from 37% over the past decade. Second, the US’ planned tariffs on $50bn of imports only forms about 2.2% of China’s total exports and 1.7% of the US’ total imports, limiting the direct impact on these economies. Lastly, the larger sectors in the Asian debt universe, especially real estate and state-owned oil and gas producers, tend to be domestically-oriented and driven by domestic demand and government policies.”
Joep Huntjens: “The Asian region has become too important to ignore, with highly attractive risk-adjusted return characteristics offered by the Asian debt market. Not only are there significant diversification benefits, defaults have also been low. Given the region’s strong fundamentals, we think that international investors would do well to increase their allocation to Asian Debt Hard Currency.”
Joep Huntjens, head of Asian Debt at NN Investment Partners
