The Asian local currency bond market only amounts to around $5 trillion with the vast majority ($3 trillion) being taken up by China, another $800 billion by India and $600 billion by Korea, says Donald Amstad, Aberdeen’s director of business development Asia.
“The liquidity in the market is comparable to that of corporate bonds, so it is certainly not as liquid as a Treasury or Bund market but it is getting better,” says Amstad, who is also responsible for marketing Aberdeen’s Asian fixed income products globally.
Every one of the ten countries within the HSBC Asian Local Bond Index (ALBI) offer five and ten-year bonds, with some having emitted longer duration bonds and inflation-linkers as well. Close to three quarter of the countries in the HSBC index are now investment grade with Indonesia expected to join their rank soon.
People should stop seeing emerging market debt in general, and Asian debt in particular as an alternative to high yield bonds, as they are “no longer a junk asset class now” with EM debt being BBB on average and Asia even A, Amstad notes.
“Anyone using a global bond index is the equivalent of someone driving a car looking in the rearview mirror,” Amstad says. “These are mostly based on historical data which is not available for Asia so how can you use these assumptions to judge the risk in a region where the economic situation is constantly changing.”
“But in fact Asia is the sun in our economic and financial solar system,” Amstad stresses, adding investors should think of Asia first when it comes to constructing portfolios.
He points out the much lower level of indebtedness of the countries in the region and cites forecasts by Citi, according to which “developing Asia” will increase its share in Global GDP from 27% currently to 50% by 2050.
The debt specialist warns “Asia is not risk free - although a lot better than many other places in the world at the moment”. He certainly sees the growth versus inflation trade-off as one of the big challenges. But according to Aberdeen Asian local currencies will gradually appreciate to help fight inflation and to help switch the economies from export- to consumer-driven.
“Asia is de-dollarising and the ‘renminbification’ of Asia, i.e. the increasing use of the Chinese currency as a reserve currency is as significant a step for the world as the introduction of the Euro was”, Amstad explains.
Another major problem being persistently higher commodity prices: “I find it unbelievable that Europe is printing money now having told Asia not to do so during their crisis and this money now goes into commodities hurting people in Asia,” he says at the conference.
According to him institutional investors should have a double-digit exposure to Asian debt. Amstad notes that for people using indices like the Barclays Global Aggregate in which Asia (ex-Japan) makes up 1.8% exposure to this region is “only noise” and “they only try to get Europe, US and Japan right” which are “a mess right now”.
Given its economic outlook China will not have to land at all but that doesn’t mean it will simply donate money to ailing Europe, says Hugh Peyman, founder and president of Asia research company Research-Works.
Contrary to “the common consensus on a hard landing in China”, Peyman is convinced the country “will be ale to pull out” of such an economic scenario.
Peyman, who spoke at the Aberdeen conference, explains there is full employment in coastal China and in the central regions of the country labour markets are tightening. There is no more young surplus labour coming out of rural China and companies have moved inland. Overall, salaries are rising at 10% p.a. fuelling domestic consumption in turn.
“In China, this is the best decade and if they don’t screw up the social stability should hold,” Peyman says, dismissing economic parallels to countries where the Arab Spring had overthrown governments.
Further, the Asia researcher sees the 12th programme unveiled by the Chinese political leadership earlier this year as a true commitment to reform, especially focussing on increasing support for the ever-growing private SME sector which is gaining in economic importance.
An agency to support small and medium enterprises has already been set up and an easing of regulations on bank lending to this sector should follow, as the nationalistic newspaper Global Times suggested - an announcement which was “quite a leap” for this state paper, according to Peyman.
He predicts these announcements will help “boost people’s confidence” in China’s economy, which the Chinese expect to make up 15% of global GDP sometime in the next years, more than doubling its current share.
However, Peyman does see political challenges and “some weaknesses” in the real economy ahead but expects inflation to already have peaked at 6.5%.
In its reform programme, the Chinese government also included the subject of interest rates and exchange rates and the Asia expert points out it “had never been that specific”.
However, despite always having been in favour of a strong Europe and a strong Euro to counterbalance the US and the Dollar, Peyman stresses Europeans should have no illusion of China helping out via “some amorphic structure”.
“China is in no rush but it will be involved in helping Europe. However, rather in infrastructure projects like toll roads which they can calculate,” he points out, adding that China will not throw good money after bad like it has done before in some of its provinces.
Peyman notes: “China had to sort out its problems itself and therefore they think so should Europe. The Chinese government has already given its advice on the Greek situation: people should pay their taxes.”
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