August 23, 2017 1:15 pm JST

Asian bonds to remain in favor despite upward trend in U.S. rates: Fidelity

Investors drawn by greater transparency, better debt management

SINGAPORE (Nikkei Markets) -- Asian bonds will continue to attract international investors due to the region's stronger economic growth and as yields remain high relative to other geographies, according to mutual fund giant Fidelity International.

Speaking at a presentation on Tuesday, Fidelity's fixed-income portfolio manager Bryan Collins said that while high-yield Asian bonds, excluding those from Japan, now pay around 6% per annum compared to over 8% some five years ago, their yields remain attractive compared to equivalent bonds in the U.S. and Europe which pay around 5% and 4%, respectively.

This is despite the generally lower default rates in most Asian countries as compared to the developed western region over the past three years, he said, citing research by Bank of America Merrill Lynch.

Asian companies, in general, have become more transparent in their dealings with investors and are better at managing their borrowings, which is reflected in various credit metrics, such as net debt-to-earnings and the company's ability to generate cash to repay debt that is due over the next 12 months, he said.

"We still see positive inflows. They are not as strong as they were say six and 12 months ago because that's when valuations were really very attractive, but we still continue to see progressive inflows into all of our strategies," he said, when asked about Fidelity mutual funds that invest in Asian bond markets.

Fidelity International was established in 1969 as the international arm of U.S.-based Fidelity Investments, which is one of the world's largest fund managers. It became independent of the U.S. organization in 1980, and is now owned mainly by management and members of the original founding family.

According to Fidelity's estimates, Asian bond markets outside of Japan have grown rapidly over the past decade and are now worth an estimated $14 trillion, double the size of other emerging markets though still smaller than North America's $27 trillion and Western Europe's $22 trillion.

The increasing size reflected Asia's rapid economic expansion as well as market reforms in countries such as China that have made it easier for companies to access the growing pool of domestic savings, Fidelity said.

Many institutional investors remain under-invested in Asian fixed income, although this has begun to change as they become more familiar with the region's corporates.

For instance, Fidelity estimates that foreigners own less than 2% of onshore yuan-denominated bonds in China. The proportion could grow in coming years as Beijing allows outsiders greater access to its domestic bond market.

Turning to the risks posed by the U.S. Federal Reserve's ongoing efforts to raise interest rates while gradually reducing its bond holdings that swelled as a result of previous quantitative easing policies, Collins said the downside is lower for those holding debt with shorter maturities.

"Bonds are actually going to be the best place to be in terms of capital preservation, income generation and lower vols (volatility) compared to some of the more volatile, risky parts of the markets like equities, for example," he said.

He added that while the U.S. and China were taking steps to tighten monetary policy, other Asian central banks would likely stand pat and could even ease conditions further, particularly in the case of India and Indonesia.

Collins' bullish outlook on Asian bonds is matched by credit ratings agency Moody's, which said in an August 11 report that the default rate for Asian high-yield non-financial corporates would remain low at 2.9% at end-2017.

"The low projected default rate reflects broad-based global growth, the recovery of commodity prices and our expectation of cautious monetary tightening in major economies, including the U.S., China and EU," the ratings agency said.

Moody's also noted that the buoyant bond market since the start of 2017 has allowed many Asian companies to raise funds to meet their refinancing and capital needs, easing liquidity pressure and reducing default risks.

According to Moody's, the default rate for non-Japan high-yield Asian corporate bonds was 1.5% in the 12 months to June 2017, down from 4.9% in the preceding 12-month period.

This was below the default rate for European and U.S. speculative-grade bonds, which stood at 2.7% and 3.8% respectively in the year to June 2017. The default rate for U.S. high-yield bonds was 5.5% in the year to June 2016 while Europe's stood at 2.6%.

--Kevin Lim

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