With or without Brexit, Singapore seen as bond haven with Korea

[SINGAPORE] Asia's higher-rated sovereign bonds are being tipped as haven assets by investors as they brace for volatility in financial markets beyond Britain's referendum on European Union membership.

The region is well-placed to withstand outflows in the event of a so-called Brexit because most major economies run current-account surpluses, Schroder Investment Management Ltd, Mitsubishi UFJ Kokusai Asset Management and Nikko Asset Management Co say.

Fund managers also see room for Asian notes to rally as slowing economic growth prompts central banks to further ease monetary policy before the Federal Reserve resumes raising interest rates.

"We expect Asian bonds to perform well, especially the more defensive countries because of safe-haven flows and potential to cut rates if needed," said Rajeev De Mello, who oversees about US$10 billion in Singapore as head of Asian fixed income at Schroder Investment.

Singapore and South Korea, in particular, stand to benefit from flight to quality as they have high credit ratings, low inflation and strong fiscal positions, he said.

Looming Risks

Asia's bonds returned 0.9 per cent in the last two weeks, beating both US Treasuries and emerging-market domestic debt, as the pound slumped to a two-month low after polls showed more Britons favored quitting the EU.

While the latest polls indicate Thursday's vote is too close to call, a decision to remain would still leave plenty of reasons for risk aversion, including Europe's refugee crisis, a slowing Chinese economy, rising US interest rates and global deflationary pressures.

"Bond markets in Singapore, Korea and Hong Kong could benefit from the flight-to-quality market sentiment," said Edward Ng, a Singapore-based fixed-income portfolio manager at Nikko Asset, which oversaw 18.5 trillion yen (S$239 billion) at the end of 2015.

"The Asian bond market that would potentially benefit the most from a remain vote would be Indonesia, which has recently cut policy rates and has not rallied as much given concerns on Brexit."

Singapore, South Korea and Hong Kong's bonds have gained this month as Treasuries rallied. The 10-year notes of the two nations along with Hong Kong's have the highest correlation in Asia to similar-maturity US debt, monthly correlation indexes compiled by Bloomberg over a five-year period show.

Market Turmoil

A gauge of global volatility jumped to the highest level since December 2011 on June 14 as the prospect the UK will leave the world's largest trading bloc roiled markets.

As much as US$2.7 trillion was wiped out from the value of global stocks from this year's high and the Bloomberg-JPMorgan Asia Dollar Index of regional currencies has retreated 1.7 per cent from this year's high in April. The Fed said on June 15 Britain's referendum was a factor in delaying a rate increase.

A slowing global economy will ease pressure on the US central bank to raise rates, pushing the yield on 10-year Treasuries below 1.5 per cent later this year, and benefit Asian bonds, said Hideo Shimomura, chief fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset Management, which oversees 12.8 trillion yen.

Bond Rally

The 10-year yield on US Treasuries has fallen 16 basis points to 1.69 per cent this month. That compares with an 17 basis point drop to 1.64 per cent for similar South Korean notes, and 15 basis point decline to 2.09 per cent in Singapore and a 10 basis point slide to 1.18 per cent in Hong Kong.

Eight out of the ten major economies in Asia outside of Japan have excesses in their current account. Singapore is set to have the biggest surplus as a share of gross domestic product in 2016 at 20 per cent, according to Bloomberg surveys of economists. This is followed by Taiwan at 12.8 per cent and South Korea at 7.4 per cent.

"Even if the UK decides to leave the EU, the impact on Asia's emerging markets will probably be smaller relatively to other emerging markets, mainly as many countries in this region have current-account surpluses," said Mr Shimomura.

"In addition, European authorities will take measures. So, drops in currencies and bonds will be a buying opportunity. Then the focus will gradually move back to the Fed."

BLOOMBERG