Of the big macro themes, which is the most relevant now for Asian fixed income?
Markets remain policy-driven but we are experiencing policy divergence. The [European Central Bank] has made its move [by announcing a €1.1 trillion ($1.2 trillion) bond-buying stimulus programme], which further contrasts [with] the economic liftoff in the US. The US’s return to growth is to some extent a drag on Asian bond markets.
And the widely anticipated rise in interest rates in the US – do you share the consensus view that this will happen in 2015?
The ECB has delivered on what it had promised, suggesting it is more likely the [Federal Reserve] will do what it’s supposed to do.
The phenomenon of low oil prices, low commodity prices in general – is that good for Asian fixed income?
The divergence among emerging markets and the different impact of commodity prices among them is well understood by investors. Asia by and large imports commodities. Analysts are still working through their projections about what this means for [national] current accounts – we are still coming to grips with the disinflation it implies. But it is a net positive.
Is the transmission of low oil prices into consumers’ pockets the same in Asia as it is in the US?
Low oil prices provide a more direct benefit to consumers in the US. In Asia disinflation has less of an impact because more prices are controlled by governments. The impact on [consumer price indices] is somewhat muted. Instead we are seeing the adjustment take place through fiscal measures. Governments are reducing fuel subsidies but may raise taxes elsewhere to maintain revenues. That’s good for Asian countries’ fiscal balance sheets but the dynamic is different among them, and compared to the US.
It’s a positive dynamic, though?
For most countries it is positive. It’s a little more mixed for Indonesia [as a natural resources exporter]. But assuming the low price of commodities reflects greater supply rather than falling demand, the net impact should boost consumption.
Given the strong US dollar, which segments of the Asian fixed income world benefit or suffer?
Obviously in a strong dollar environment, demand for dollar-denominated fixed income remains. Today 50% of the global market for government bonds trades at yields of 4% and less. So any government bond that provides a higher yield will attract flows, and that is positive for many Asian names.
But within the local currency markets, it’s about diverging local policies. We favour markets that have the ability to ease monetary policy, where governments continue to enact reforms, and which benefit from the commodities picture. India is a clear example where we are overweight.
And Indonesia?
Our view has become more positive and we have a small overweight now. It hasn’t done as much to improve its balance of payments but what it’s done is good enough, and it looks attractive relative to the global emerging markets universe.
A year ago, most investors would cite China as a driver for the region. Is that still the case given its obvious economic slowdown?
Investors and analysts are more comfortable now that China is moving to a sustainable growth path. There are fewer concerns about financial instability and more hopes for a monetary easing. Of course China will experience hiccups and the focus now in the market is on high-yield bonds issued by property developers. But such discussions are very sector specific.
What do you favour in Chinese fixed income?
We like government bonds. We have a more balanced view on credit. Overall our focus has moved away from high yield to better quality names and state-owned enterprises. That’s also now what’s in the market for new issuance. For example, many banks and asset management companies are issuing bonds, for reasons such as meeting Basel III capital rules.
What are the question marks around the high-yield sector? [At the time of this interview, Chinese developer Kaisa had been expected to default on a 10.25% bond due 2020 on February 7, following revelations it was under investigation for alleged corruption.]
What’s happening to the property sector is policy-induced. I don’t know if policymakers fully understand the implications for external funding. The anti-corruption campaign has led to a number of companies being investigated, which leads to uncertainty. The markets are in a shoot-first-and-think-about-what-happens-later mood. The news flow out of Shenzhen is turning more positive, however. [The Shenzhen government had frozen Kaisa-related real estate projects; Kim declined to talk specifically about Kaisa or other individual companies.] They’ll want to stabilise the sector, and easing [by the People’s Bank of China] at the macro level should help.
You referred to the implications for external funding. Can you elucidate?
There is a broader implication for Asian high yield’s longer-term development. India has stringent regulations on external commercial borrowing. Indonesia is considering rules that would prevent companies rated double-B or lower from issuing abroad. So the main source of high-yield bonds has been China’s real estate industry. Those developers need the high-yield market because they struggle to get financing onshore. If China mismanages the situation for offshore holders of its high-yield bonds, the Asian high-yield market will collapse. It raises the question: what is the meaning of high yield in an Asian context? It’s notable that year-to-date there has been no new issuance in this segment.
Is there an alternative to high-yield bonds?
The risk to the market is that we go back to where we were 10, 15 years ago, when funding was mainly done through private deals. The political pressures are unpredictable. But this also highlights the dispersion within the fixed income space in Asia. We are very comfortable with investment-grade borrowers in China, such as the [state-owned enterprises]. And I should add that, although there are investigations into companies that have tapped high-yield markets, there is no clear evidence that these companies actually did something wrong. I assume the government will resolve the issue and avoid disrupting markets or doing anything that would disrupt social stability.
You’ve talked about your overweights. What are your underweights?
Malaysia. Its fiscal situation is deteriorating. The current account surplus is rapidly declining. It’s not in crisis but I expect some adjustment is required. That could include weakening the ringgit. Malaysia is also exposed because a lot of its local-currency debt is held by foreigners.
To what extent is Abenomics and the weak yen impacting Asian fixed income?
There doesn’t seem to be a direct link. We’ve seen flows out of Japan into our business in Australia and to other high-quality sovereign bond markets. But money leaving Japan hasn’t gone to Asia ex-Japan, not yet. At some point it probably will.
Your question raises a broader trend, which is the lack of fixed income generally. The demand far outstrips supply for quality fixed income. Disinflation is more than just a story about commodities; it is being caused by technological disruption and changing demographics. That supports fixed income, especially in high-quality markets that provide a return, as we saw in the case of Switzerland. That suggests other Asian hard-currency, investment-grade markets such as Australia and Singapore will continue to see inflows.
With brokers reducing balance sheet activity, are liquidity issues in Asia as challenging as elsewhere?
Yes, because it’s the same global banks, the same global balance sheets. Ten years ago I expected local government bond markets would change. I thought they would become less reliant on brokers in the primary market and [on] buy-and-hold investing and more like a model where banks and brokers used a balance sheet to make markets. But it seems to have gone the other way. Reduced liquidity is just something we have to live with. But I do now see a few global banks trying to come back in Asia.
Come back with balance sheet?
I won’t mention names but a couple of banks are looking to do more here, if they have the ability to take risk and if they see an opportunity to make money in specific Asia situations.
What kind of risk might they take?
You’d have to ask them. But they are thinking about where we are in the credit cycle and if activity will pick up in the distressed space.
Joel Kim has been managing Asian fixed income portfolios since 2002, first with ING Investment Management and, since 2011, as head of fixed income for Asia Pacific at BlackRock.
