European investors should look to emerging market bonds, particular from Asia, as the fixed income portion of their portfolios, says Simon Fasdal, head of fixed income trading at Saxo Bank. Not only will they benefit from diversification and higher yields, but also from a more effective balancing of their equity exposure, he tells Hong Kong media in a conference.

While the excessive liquidity in the system, thanks to bond purchases by the European Central Bank, has supressed yields on European bonds, bringing those on German bunds close to zero, emerging markets still offer healthy returns. Unlike European bonds, they are still capable of functioning as a counterweight to equities in balanced portfoliosby gaining in value when equity prices (and bond yields) decline.

Asia, notably China, and to some extent the US, are beacons of hope in the decelerating global economy. While the US economy is "going in the right direction", says Fasdal, "Asia is where it's happening at the moment." Even though China's economy is decelerating, it's still growing at an enviable pace of 7.3%, and he believes that this "controlled slowdown" reflects a shift from "quantity growth" to "quality growth".

Investors are eager to invest in China, as evidenced by an overwhelming success of the Alibaba initial public offering and a recent issue of a contingent convertible (CoCo) bond by the Bank of China, which was oversubscribed by the factor of 6.6, according to Fasdal.

The reaction of EM bond markets to the May 2013 comments by Ben Bernanke, then US Federal Reserve chairman, about tapering of the Fed's asset purchase programme, has "washed out" Asian bond market and left it a much healthier relationship between risk and value, observes Fasdal.

Even some recent credit events in China are a positive development, he says. They reflect healthy level of risk in high-yield bond market and contribute to its attractiveness.

Although many geopolitical and economic risk factors loom over the global economy, neither asset bubbles, nor inflation are among them at the moment. "We would like some inflation in Europe, so we don't end up in Japanese-inspired deflation cycles."

The US Fed needs to maintain credibility and to control inflation, therefore it is not going to raise interest rates too soon or too fast, as some fear, believes Fasdal. Both the strong US dollar and low oil prices provide a stabilizing effect on the global economy. It appears that the oil price, in particular has found a ceiling at US$110 due to the abundance and flexibility of US shale oil production and other sources that become economical at that price, he says.

While emerging market fixed income is the "sweet spot" for bond investors, Fasdal recommends overweighting in two markets, Philippines and Indonesia, while remaining cautious about Chinese bonds.