Private banks lure negative-yield refugees to Asia after Brexit

[SINGAPORE] Investors fleeing negative-yielding bonds as Brexit spoils the global economy's outlook are turning to a region with the world's fastest growth and rising corporate earnings - Asia.

Private banking arms of Deutsche Bank AG and Credit Suisse Group AG advised clients to buy investment-grade Asian corporate notes that offer the safety of the dollar coupled with higher yields than comparable US debt.

Global investors poured a record amount of money into emerging market-debt funds in the week ended July 6, with developing Asia bonds a key beneficiary, according to data provider EPFR Global.

"We're seeing clients over the last weeks move investments to Asia because they still have some yields," said Christian Nolting, Frankfurt-based global chief investment officer at Deutsche Bank Wealth Management.

"You go to areas where you see at least earnings stabilise or grow. That's Asia, because Latin America politically is a very tough one still."

Asia's top-rated bonds have attracted inflows as stocks swung wildly since Brexit, with the MSCI World Index of equities barely recovering its losses. The Asia-Pacific's 300 biggest companies earned about US$160 billion in the latest quarter, up from US$144 billion a year earlier, while those in the US saw total profit stagnate at US$189 billion, data compiled by Bloomberg show.

The International Monetary Fund predicted in April that Asia's developing economies will grow 6.4 per cent in 2016, outpacing the 1.9 per cent expansion in advanced economies.

Asian investment-grade dollar bonds offer a premium of 347 basis points to 10-year German bunds, 191 basis points more than than similar-maturity US Treasuries and of 58 basis points to similar-rated debt of American companies, based on indexes from JPMorgan Chase & Co and Bank of America Merrill Lynch.

While the return on the region's corporate notes have trailed their US and global peers this year, they've outperformed both since 2014, the indexes show.

The amount of sovereign and corporate bonds with zero or negative yields has doubled to US$10.1 trillion since Britain's June 23 vote to exit the European Union.

A shrinking supply of debt from Asian issuers is enhancing their allure, especially for those who can fund investments by borrowing money at negative interest rates, according to Credit Suisse.

The European Central Bank's purchases of investment-grade corporate bonds since June is also starving investors of opportunities in that continent.

"Demand has increased because the ECB is sweeping up bonds in the European region and a lot of buying will go to Asia to pick up yields," said Jack Siu, a Hong Kong-based investment strategist at Credit Suisse's private banking unit.

"We still recommend Asian investment-grade bonds as an area of protection, income generation and for keeping your cash safe. We are also seeing reduced supply in Asia."

Dollar bond sales in Asia outside of Japan dropped 19 per cent to US$85.7 billion this year through July 14, according to Bloomberg-compiled data, as a weakening yuan and falling local borrowing costs prompted Chinese companies to raise funds domestically.

Clients of Deutsche Bank's wealth unit prefer dollar bonds as they want to avoid the risk of holding local-currency debt, according to Tuan Huynh, its regional head of portfolio management for Asia Pacific.

Strategists predict all 10 major emerging Asian currencies will weaken against the greenback by the year-end, according to surveys compiled by Bloomberg. South Korea's won is forecast to weaken 5.1 per cent, followed by a 4.9 per cent drop in Malaysia's ringgit and a 4.1 per cent decline in Indonesia's rupiah.

"We still predict US dollar strength over time," said Singapore-based Mr Huynh. "So we would be more comfortable with having the US dollar predominantly."

China Life Insurance Co and four Chinese banks delivered the biggest profits in the most-recent quarter. The nation's Internet giant Tencent Holdings Ltd was among the 30 biggest earners along with Korea's Samsung Electronics Co, Taiwan Semiconductor Manufacturing Co and Indian refining and telecommunications conglomerate Reliance Industries Ltd. They all have investment grade ratings from S&P Global Ratings.

BlackRock Inc, the world's largest money manager, prefers Chinese technology companies and state-run companies of India and Indonesia.

"In the current low growth environment, Asia continues to be a bright spot," said Neeraj Seth, the Singapore-based head of Asian credit at BlackRock, which manages US$4.7 trillion globally.

"Asian credit, especially Asian investment-grade, has been a favoured destination for global and regional investors seeking strong risk-adjusted returns."

BLOOMBERG