now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
Asset Management / Wealth Management
What’s big, red and could rock Asia’s bond market more than rates?
Now the biggest driver of Asia’s G3 bond market, China could also become a major source of market instability, say Astute Investors
Monica Uttam 18 Jan 2018

CHINA is now the biggest driver of Asia’s G3 bond market. But could it also become a major source of market instability? Amy Kam, an investment manager at GAM, believes it may well be a factor in the future. In a survey conducted by Asset Benchmark Research (ABR) in October 2017 of the most Astute Investors in Asia’s G3 bond market, participants cite the headwinds that could disrupt the market’s rapid growth.

Kam and a handful of investors agree that unexpected policy moves by the Chinese government are among the risks the market faces in the coming months. If the People’s Bank of China, the country’s central bank, initiates a clampdown on cross-border US dollar investment, investors surveyed by ABR say they are not confident the supply of paper will be absorbed by the market.

Bond issuers in Asia ex-Japan raised a record US$439 billion through notes issued in U.S. dollars, Japanese yen and euros (G3) in 2017, up nearly 40% from a year ago. Demand is coming from a number of directions including Chinese investors, global funds that are increasing their allocation to emerging markets, and private banks/ultra-high net worth individuals.

Sixty-two percent of surveyed investors cited Chinese investors as the most important factor currently driving the bid for G3 Asian credit, followed by 21% citing the increase in allocation to emerging markets by global funds as the number one factor, according to the ABR survey.

“Asia continues to defy its international critics with strong local demand borne by the twin pillars of Chinese institutions and local private bank/ultra-high net worth,” comments Alistair Ling, a fund manager at Man GLG Partners in London, who takes the top spot in the most Astute Investor ranking for UK and Europe.

Zhou Shengwei, an investment manager at China Zheshang Bank, who ranks top among most Astute Investors in China, agrees: “The driving power still comes from Chinese investors and we see private bank investors playing an important role in the high yield part.”

As Chinese investors now dominate the market, their demand has led to the tightening of bond spreads. Onshore money has been flowing into dollar bonds on the back of the appreciation of the US dollar against the renminbi since late 2015. Global liquidity has also been ample and with Asia displaying strong fundamentals foreign investors have increased allocations into emerging market bonds.

“Asia is increasingly separating itself from broad EM as it has provided good risk-adjusted returns and with little mark-to-market volatility,” says Abhijeet Neogy, a portfolio manager at PIMCO in Singapore, who places first in ABR’s ranking for the city-state.

While optimistic, investors agree there are clouds on the horizon. The China factor is one and so is an unexpected sharp acceleration of rate hikes in the US. Others point to the unanticipated accelerated release by the Fed or other central banks of assets, reducing overall liquidity.

The Fed funds rate was last raised in December to 1.5%. Investors are pricing in at least two rate hikes in the coming year, with some expecting three. “A sharp US rate hike or expectation of such will likely trigger major sell-off,” says Kam. “I feel, on the whole, international investors are still bearish on China and would turn negative on any headlines.”

Charlie Hu, a fixed income portfolio manager at China Life Franklin Asset Management is less worried about rate hikes as he is about central bank movements. “I think the credit and rates market has already priced-in certain rate hike and balance sheet reduction going forward. If the liquidity unexpectedly drains from markets due to aligned global central bank movements, the credit market is more likely to retreat from here.”

The move by the Bank of Japan to cut its purchases of Japanese government bonds last week may be a harbinger of things to come. Their central bank is in line with those of several other developed countries’ central banks that are tightening monetary policy on the back of robust global economic growth.

G3 bond investors are also concerned about geopolitical risk. “The situation with North Korea could escalate very quickly,” says Kam. Inevitably, a deterioration of the outlook could spook the market causing it to sell off.

Methodology
The Asian G3 Bond Benchmark Review was conducted in the third quarter of 2017. A total of 429 Asian G3 bond investors including asset managers, hedge funds, private banks, insurance funds and commercial banks from Hong Kong, Singapore, the rest of Asia, UK/Europe and the US took part.

Data sets include market penetration, market share/wallet share, buying criteria/client satisfaction, research content and the top individuals. Follow-up interviews are conducted with a selection of respondents in each market to provide qualitative data. To learn more about the Asian G3 Bond Benchmark Review please click here.

Conversation
David Wong
David Wong
senior investment strategist, equities
Alliance Bernstein
- JOINED THE EVENT -
7th Taiwan Investment Summit - Webinar Series 2021
Transitioning to a green future
View Highlights
Conversation
Donald Amstad
Donald Amstad
global head of client growth
abrdn
- JOINED THE EVENT -
Webinar
APAC Climate Change Progress & Obstacles in 2022
View Highlights