Borrowers from Australia and New Zealand are keen to build on relationships with institutional investors in Asia, given the region’s growing share of public and private wealth. Over the past few years, the Asian bid has become a critical component of the bookbuilding process for Australian issuers with up to 50% of bond transactions being placed with Asian investors.
To learn more about Asian institutional investor attitudes towards Australian debt securities, FinanceAsia and National Australia Bank conducted a survey asking participants to offer their views on macroeconomic indicators and provide information on allocation strategies. They also shared their thoughts on the importance of hedging, and the intricacies of choosing a counterparty bank.
The survey results were published in FinanceAsia’s 10th annual Australia Report this month.
More than 65% of respondents to the poll said they already invest in Australian dollar or New Zealand dollar debt securities, while another 12% said they plan to invest in the next 12 months.
Investors representing all types of firms participated in the survey including asset managers, commercial banks, hedge funds, insurance companies, private banks and sovereign wealth funds. While a large number of these were based in Hong Kong and Singapore, there was also a significant showing from Taiwan, making up 20% of responses.
Punching above its weight
Of those survey participants who already invest in Australia, just under half report having an exposure of between 1% and 5% of their portfolio, while another 24% hold more than 10% of their portfolio in Australian debt securities. This is a sizeable allocation considering Australia’s small weighting in global bond indexes.
Commenting on the survey results, Steve Lambert, executive general manager of debt markets at National Australia Bank (NAB) in Sydney, said institutional investors in Asia – such as central banks, national pension funds and sovereign wealth funds – have already made the transition from “no exposure to Australia” to “a meaningful exposure”.
“Investors from Asia tend to hold more Australian dollar assets than other institutional investors around the world,” said Lambert. “Typically a global balanced bond fund might hold 1% to 2% of the portfolio in Aussie securities, but this survey shows there is a larger interest in our bonds from Asian investors,” he said.
Lambert believes the enhanced interest relates to geographic proximity, with Australia being the fourth largest economy in the Asia time-zone, next to China, Japan and India. “Australia also has an active bond market,” said Lambert. “Managers in the region have more responsibility for product in this time-zone and are likely to be mandated to take responsibility for regional investments,” he said.
It’s no surprise then that 76% of poll respondents indicated they now consider Australia to be part of their Asia strategy. “This is a pleasing change in mindset,” said Jessica Tilton, head of markets, Asia for National Australia Bank based in Hong Kong. “Only a few years ago people used to talk about Asia as being ex-Australia, but now it is viewed as part of the region thanks to the strong trade flows between countries. As Asia grows and wealth expands, Australia will be able to take advantage of this growth.”
Ebb and flow
Appetite for Aussie debt ebbs and flows based on global and regional trading conditions, and the poll results show investors have adopted a cautious tone over the past 12 months.
As many as 46% of participants said they had decreased the proportion of Australian debt, possibly driven by downward pressure on the Australian dollar, and a drop in the cash rate from 4.25% in April last year to 2.5% currently. Anecdotal evidence suggests Japanese investors have offloaded nearly one-third of their Australian debt securities since the beginning of the year.
That said, a larger percentage of participants (52%) said they had increased their holdings in the past 12 months, and when asked about their future plans, the market is likely to receive continued support with 46% of overall respondents expecting to maintain an exposure of 5% or more of their portfolio. Importantly, 6 out of 50 participants announced they plan to take their first exposure to Australian debt in the next 12 months.
As it stands, there is a bias towards buying securities issued by government agencies and financial institutions which is where there is greatest depth in liquidity. For commercial bank deals, NAB says up to 50% of each transaction can be allocated to Asian accounts.
But the poll also forecasts a shift in relative weightings to corporate bonds, with 64% of active investors indicating they already own corporate credits, and 75% indicating they plan to increase their allocations to this issuer type in the next 12 months.
When analysing a debt security, the most important factor in the decision-making process is the yield. Nearly 65% of poll participants cited yield as an essential component, while 58% cited tenor and another 54% said credit rating was essential. The least important factor was the value of the Australian dollar.
In a similar vein, investors listed pricing as the most important factor when choosing a counterparty to trade with, followed by execution and back office support, credit rating of the counterparty, and relationship.
“The strength of the relationship is obviously important,” said Tilton. “Investors like to use platforms for pricing indications but they still want to deal directly with sales to complete trades.”
Several investors noted additional factors that sway their counterparty choices, including access to traders who are available early in the morning, and the ability to trade Australian dollar paper outside of Australian business hours. Another indicated a wish to deal with traders that were professional and credible, prompt and proactive; while another said it was important to receive soft sounding of new deals ahead of issuance.