A survey of Asia-based investors conducted by FinanceAsia and National Australia Bank (NAB) in August this year shows bond buyers now see Australia as an integral part of their long-term fixed-income portfolios. Borrowers in Australian and New Zealand dollars are experiencing increased appetite for their debt securities from real-money investors wanting longer tenors and larger ticket sizes.
The poll of institutional investors in the Asia time-zone builds on evidence collected in two previous surveys conducted in 2013 and 2014. Respondents were asked to provide information on allocation strategies and indicate whether they planned to increase or decrease their exposures.
Investors representing all types of firms participated in the survey, though this year there was a larger proportion of asset managers and private banks. Overall, 26% of respondents said they worked for commercial banks, 23% represented asset management firms and 22% were private bankers. Geographically, the majority of investors hailed from Hong Kong and Singapore.
Compared to results from 2014, this year’s survey showed a significant increase in the number of investors who reported holding more than 10% of their overall fixed-income portfolio in Australian dollar debt securities. A full 38.5% say Australian borrowers now represent more than 10% of their holdings, versus 27.7% of respondents in 2014.
“Sentiment for Aussie dollar bonds has been strong for some time, partly due to the interest rate differential,” said Jessica Tilton, head of markets Asia for NAB, commenting on the results. “Even though our rates were low by historical standards, they were higher than in most other developed markets and this was acting as a drawcard.”
Connie Sokaris, who heads investment grade origination at NAB, believes the increase in the number of investors who now hold a meaningful allocation to Australian dollar debt securities is in line with the maturation of the market. “The diversity of the Australian market is starting to mirror other, more developed bond markets around the world,” Sokaris said. “Liquidity is increasing and investors are learning that secondary market spreads in Australian bonds can be less susceptible to volatility in global markets.
Market takes a breather
Despite the solid results, this year’s poll also foreshadows a pause in exuberance. Investors are expected to continue to look to Australia for solid credit ratings and geographic diversification, but a drop in the value of the Australian dollar over the past 12 months and a likely move up in US interest rates are impacting investor interest.
The more cautious tone is reflected in the forward looking statements made by poll respondents. Nearly half of those surveyed talked about decreasing allocations, with only 27% expecting to hold more than 10% of their portfolio in Australian dollar debt securities by August next year. More than 50% said they expected to hold between 1% and 5% of their portfolio in the asset class in 12 months’ time, while another 4% said they expected to reduce their exposure to zero.
Tilton said the results show investors are taking the opportunity to pause. “The Australian bond markets have had a very good run for a number of years and now the environment is changing,” she said. “The US economy is picking up strongly and the Federal Reserve has announced its intention to raise interest rates. Understandably, investors are more cautious about adding on Australian debt while they wait for the Fed to make a move. For the first time in a long time they see a chance to make higher yields in other markets.”
More immediately, investors have been impacted by the sell-off in the Australian dollar which has fallen around 20% since July last year from around 0.93 cents to the US dollar to 0.73 cents now. Asked to predict where the Australian dollar would trade against the US dollar in the next 12 months and 28% of respondents said they expected it to trade below 0.70 cents while 16% said it would move back above 0.80 cents.
“The poll indicates that nearly 70% of Asian fixed-income investors don’t hedge their Australian dollar exposure which means they are impacted by movements in the currency,” Sokaris said. “However we expect private bank clients to be more influenced by gyrations in the dollar than other investors such as central banks and commercial banks. Very often these investors hold Australian dollars as a natural hedge or they take such a global multi-currency view that they can withstand ups and downs.”
Demand for new issuers
Commenting on other trends in the survey, Sokaris said appetite for investment-grade corporate issuers remains robust, reflecting a general shift in the relative weightings of what Asian investors want to buy. As many as 38% of poll respondents indicated they would like to see more investment-grade corporates brought to market, while another 20% indicated a preference from high-yield non-rated corporate issuers.
“Corporates offer much needed diversity for investors,” Sokaris said. “As it stands, deals from financial institutions outnumber corporate deals on a ratio of four-to-one which creates a real scarcity value for corporates.”
She said, compared to other markets, Australia also offers a unique opportunity for investors to gain exposure to infrastructure and utility credits. “The country has an enviable privatisation agenda and there is a great opportunity for originators like NAB to deliver these issuers in coming years.”
Poll respondents say the sweet spot for Australian dollar investments is in the triple-B band. Nearly 45% of those surveyed said triple-B was their preferred credit rating, while another 32% pointed to single-A as the sweet spot. “What really stands out is the 16% of investors who suggest their optimum credit band is sub-investment grade,” Sokaris noted. “To me this shows Asian investors have reached such a level of comfort with the Australian market that they are prepared to go down the yield curve or invest in slightly longer tenors."