Asia fixed income offers positive spots in world of negative yield

Singapore

WITH around 15 per cent of the global bond market negative yielding, strategists on the hunt for yield have set their sights on capturing Asia's improving economic momentum in 2020.

Many strategists are targeting China, which accounts for more than half of Asia's fixed income market.

This comes as Chinese government bonds have been part of the Bloomberg Barclays Global Aggregate Index since April.

With their upcoming inclusion on JPMorgan's benchmark emerging-market indexes in February 2020, demand for such issues by global funds will continue to rise, State Street Global Advisors' Asia-Pacific head of fixed income Ng Kheng Siang said at a press briefing.

"In China, government bonds are still relatively attractive with yields around 3.2 per cent, compared to the US Treasuries which have a yield of about 1.7 per cent and Europe's negative-yielding sovereign bonds," he told reporters.

At a media briefing in late-November, BlackRock head of Asian credit Neeraj Seth said: "We are moderately positive on the credit markets in Asia and remain fairly selective in 2020 but are positive on both China's high-yield US dollar-denominated bonds as well as local currency ones."

Meanwhile, Steve Ellis, Fidelity International's global chief investment officer (CIO) for fixed income, said at a 2020 outlook to clients on Friday that Chinese debt offers a decent yield, adding that default rates have remained low.

In particular, wealth managers see opportunities in Chinese developers' shorter-duration issuances, on expectations that they will continue to report reasonable sales growth and be supported by more accommodative policies.

In its 2020 market outlook, Credit Suisse said authorities in China have taken steps to prevent the real estate sector from overheating.

"We believe that their actions are not aimed at depressing or constraining the sector, given the weakness in manufacturing," it said.

Likewise, Pictet Wealth Management's Asia CIO David Gaud told reporters last week that while his firm is underweight on fixed income globally, it is overweight on China real estate bonds.

But he noted bottom-up picking is key, adding he would stay away from the Tier-2 and Tier-3 property players "because consolidation in China is going to benefit the leaders.

"Moreover, we expect more defaults among lower-quality names in China's fixed income market. So, stick to the top 10 developers," he said.

With a net yield of 5.1 per cent, Credit Suisse also sees Asian high-yield bonds as more attractive relative to their US and European counterparts, which have net yields of 1.9 per cent and 2 per cent respectively.

Another reason for a bigger focus on Asia is the expected additional pick-up in yield from local Asian currencies against the US dollar.

With 2019 being a strong year for the US dollar, State Street's Mr Ng is of the view Asian currencies have "room to perform better" in comparison to the greenback in 2020.

Pictet's Mr Gaud noted that growth in Asia's economies will accelerate at a quicker pace than developed markets on the back of accommodative policies and measures.

He expects US economic growth to slow to 1.3 per cent in 2020 after experiencing better-than-usual growth in recent years.

Coupled with recovering growth in Asia, local currency denominated bonds "make sense", Mr Gaud added.

State Street's Mr Ng pointed to Indonesia as an example where investors can benefit from positive carry from the rupiah's continued appreciation against the US dollar.

"We expect the local currency to be defended by the central bank so there won't be substantial weakness," he said.