Asian bonds resilient despite headwinds

Western Asset remains loyal to selective emerging Asia bonds despite recent outflows, with a bias towards North Asia credits, while avoiding frontier markets such as Mongolia.

Although the past 12 months have been challenging for the emerging Asia fixed-income market, Western Asset still sees opportunities in the region, especially in North Asia whilst staying clear of frontier markets like Mongolia.

Asia bonds as a whole have underperformed – losing more than 6% over the past 12 months. But amid the downward adjustment comes more attractive valuations, highlights Western Asset, which is a fixed income management investment company and wholly-owned subsidiary of Legg Mason, an asset manager with about $679.9 billion of assets under management (AUM).

“When we look at fundamentals, Asia remains strong versus the rest of the emerging markets and the global economies,” said Singapore-based Chia-Liang Lian, head of investment management for Asia ex-Japan at Western Asset at a press conference in Hong Kong on February 17.

“Technical wise, there is a little bit of a headwind from broader emerging markets but we do think the long-term support for income-generating products remain strong.”

Fundamentally strong North Asian markets such as China and South Korea continue to stand out, in addition to other Southeast Asian investment grade countries such as Singapore – being one of the remaining seven triple-A sovereigns to exist globally, says Lian.

“The emphasis is really one of credit differentiation,” said Lian. “This underscores our emphasis on high quality countries with so-called developed market-like attributes.”

The firm – which has $4.7 billion worth of AUM in Asian fixed income – also notes that the same goes for recently upgraded Republic of Philippines, a country it has been increasing exposure to. A major reason was the fact that the country obtained investment grade ratings from all three foreign rating agencies last year.

While Western Asset remains positive towards select markets in Asia, it maintains an underweight position on frontier markets such as Mongolia. “We remain cautious because it is a relatively new issuer and on top of that we don’t think it has gone through the full market cycle,” said Lian.

The need to differentiate

The need to differentiate between different types of credits in the region is key to driving portfolio performance because Asia could be viewed differentially by various investors, says Lian.

As a result, Western Asset breaks it down into the types of credits that it sees opportunities in, especially short-dated investment grade names. Quasi-sovereigns, for example, are able to offer decent yield pickup and carry over the sovereign.

“We get paid additional new [yield] pickup [when investing] in important quasi-sovereigns,” said Lian. “Such credits give us a yield increment but at the same time not adding too much additional risk to our portfolio.”

In addition, certain sectors within the high-yield space offer potential yield pickup, particularly those rated at least BB and above, notes the firm. However, these credits warrant extra-due diligence given their riskier nature.

“In the high-yield space, we spend a lot of time scrutinising the structure of the bond,” said Lian. “We remain concerned about the slew of credits issued with a standby letter of credit. In fact, we have zero holdings in these instruments because we feel that the risk may not be properly or adequately priced.”

“We prefer issuers who have reasonably strong track record,” he added. “The ones that have weathered through business cycles are the ones that have proven to have a bondholder-friendly culture.”

Lian highlights that Western Asset is overweight utilities in the Indonesian market as the country is underinvested in the sector as well as in telecommunications although valuations have become much tighter recently. The firm also prefers strong BB-rated Chinese property names that are well-diversified between different tier cities.


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