Asian fixed income


“We believe that, without a doubt, developing Asia is the place to be when considering the optimal risk-return profile.”


Q: How do Asian bonds fit into an overall fixed income portfolio? A: Asia provides a diverse set of markets and a broad set of country issuers across the credit spectrum, offering good opportunities for investors to enhance portfolio yields. The credit ratings of 10-year Asian government bond yields range from AAA in Singapore to BB in Vietnam. The Asian bond market has also expanded to offer a diverse range of fixed income opportunities including inflation-linked bonds, investment-grade bonds, long-maturity bonds and new government issues. We believe that Asia, and specifically developing Asia, presents an expanding range of fixed income investment opportunities. From a risk-return perspective, Asian bond markets have performed relatively well in comparison to U.S. high yield bonds, generating similar returns but with less volatility. The asset class has also shown relatively low correlation to developed- world bond markets, and we expect this low level of correlation to remain for quite some time.


Q: What opportunities are there to invest in the Asian bond markets and what are their benefits? A: We think of the Asian bond market as having two distinct markets – namely local currency and dollar bonds. The local currency bond market is the larger of the two and offers currency diversification,


and hence the potential to benefit from regional currency appreciation. It also offers local interest rate exposure across markets of different credit quality. The Asian dollar bond market is smaller, largely investment- grade and offers an attractive yield over U.S. Treasuries. Taken together, these two markets


provide investors with a broad opportunity set in rates, currency and credit with the breadth and flexibility to meet a wide range of return expectations. Depending on which strategy is chosen, investors can potentially take advantage of an asset class delivering diversification and positive risk/reward benefits given low historical correlation with other asset classes. We also see Asia in particular as a compelling “lower risk” investment opportunity when compared to developed markets.


Q: How do inflationary pressures in the region affect future trends? A: When talking about inflation in Asia, you must also take into account the monetary policy of developed economies. Of increasing concern is the West’s ability to service its debts, which undermine the credibility of its government bond markets. Asian governments, on the other hand,


are far healthier and more solvent than their Western counterparts, having much lower liabilities. It now seems that Asia is looking towards domestic demand-led growth and this means the embracing of a stronger, appreciating currency. Furthermore, we


believe Asian governments will be looking to invest at home and will allocate their savings to their growing capital markets and infrastructure projects, which will ultimately benefit their own populations.


Q: Do you believe that investors should make a discrete allocation to Asian fixed income? A: In our opinion, yes, absolutely. We believe the Asian fixed income markets represent a unique asset class that justifies inclusion in a global portfolio. In our view, global investors remain under- invested in the region. Exposure is typically made through global debt benchmarks; however, these benchmarks typically have low allocations to Asia, may not be particularly active, have allocations to less creditworthy countries and possess limited local currency exposure.


Mr. Michael is responsible for the management and investment performance of Aberdeen's Asia-Pacific fixed income and capital market products. He is also a member of the global strategy group, the global insurance group and was a member of the tactical asset allocation committee. Mr. Michael has a BEcon and a MEc in Economics from Macquarie University, Australia, a MComm in Applied Finance from the University of New South Wales and a Graduate Diploma in Securities studies from the Securities Institute of Australia.


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