- ‘Kangaroo effect’ sees Australia as destination of choice for foreign issuers
- Asian bonds more attractive as governments put their houses in order
As fears of a sell-out of fixed interest assets build, investors should look beyond large developed bond markets, to Asia and to Australia, for less volatility and potentially higher returns, according to Legg Mason affiliate Western Asset.
During the GFC, many investors fled to the safe haven of fixed interest , but concerns are now surfacing as to whether there could be a sell-off in developed markets like the US, Europe and Japan.
According to Western Asset, not only do Asian and Australian bond markets represent good value in their own right, they are also less susceptible to global events causing market jitters, such as a potential US double dip.
“If you are concerned about global uncertainty, such as the possibility of a US double dip recession, then Asian and Australian bonds are the place to be,” said Rajeev De Mello, head of Singapore fixed income at Western Asset. “During the last quarter of 2008, for example, Asian bonds proved resilient to the global sell-off.”
Why Asian bonds for Australian investors?
A decade ago the Asian region was considered an emerging market, but economic fundamentals have improved for many countries. Several regional bond indices have been created in recent years and bond funds can provide ready access for foreign investors.
“There are still a lot of myths around about Asian bonds being risky and illiquid, but with governments across the region putting their houses in order, and yield rates attractive, the risk/return equation is looking really good,” said De Mello.
As well as representing good value and stability, Asian bonds are also attractive as a currency play. China’s recent change to its exchange rate regime is likely to lead to faster appreciation of Asian currencies in the medium to long term, while increased investment in the region will also support currencies.
“Foreign ownership of local currency bonds across Asia has already begun, with around 27% of Indonesia’s bond market held by foreign owners. Singapore has around 20%, while Thailand has less than 10% but China and India have less due to entry barriers for foreign investors”, said De Mello.
Korea has also been one of the main beneficiaries of cross investment within Asia and is one of the most liquid and highly rated bond markets in the region.
De Mello adds bonds provide good diversity for a portfolio, for an Australian investor, but are also more straightforward than some other more structured/indexed fixed interest products available.
The ‘kangaroo effect’
Australian fixed interest has also been attracting the attention of foreign investors, due to its good yields and positive outlook.
However the so-called ‘kangaroo effect’ is also taking hold, with many foreign corporates now choosing to issue bonds in the Australian investment grade market.
“It is now possible to issue long-dated bonds, with terms of up to 10 years, bringing Australia into the ‘big league’ of bond issuers like the US. This is a sign that the local market is really developing,” said Anthony Kirkham, head of investment management for Western Asset Australia.
“Australia is now becoming a destination of choice for corporate bond issuance, and we predict many more entrants will come.”
Kirkham recommends that investors target a fixed interest fund that offers a diversified selection of companies and sector allocations when looking to invest in Australian bond markets.
“It is also important to look for stable returns, and having a globally integrated research capability helps,” Kirkham said.
The Legg Mason Australian Bond Trust is ranked as the top performing Australian (Core) Fixed Income fund over one year in the Mercer August 2010 Survey.