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Asian Debt poised to deliver attractive returns

Asian Debt is poised to deliver attractive returns, particularly on a risk-adjusted basis, when compared with bonds in other parts of the world, ING Investment Management International believes.

For Asian Debt Hard Currency the firm’s expected 2014 return is in the range of 2.5 to 4.5 per cent whereas for Asian Debt Local Currency it is expected to be between one per cent and three per cent 
With fixed income set to have a potentially difficult road ahead given expectations for higher rates, ING IM highlights that this is why yield is increasingly important.
Joep Huntjens, head of Asian Debt at ING IM, says: “With the US Federal Reserve committed to their ultra-low policy rate until at least 2015, the US Treasury yield curve will remain steep providing attractive gains for investors that take on modest amounts of maturity risk.
“Additionally, global investors remain underinvested in Asian bonds given the gaps in global indices. Savvy investors are sure to diversify their risk exposures, thus capital will flow to Asia to fill the holes in geographic diversification.”
Looking ahead, ING IM expects that Asia (excluding Japan, Australia, New Zealand) will continue to be the region that generates the fastest rate of growth with countries such as China and the Philippines expected to register growth in the high-six per cent to low-seven per cent range while all other countries are expected to deliver growth between two and five per cent. However, the investment manager notes that growth momentum is slowing at the same time that developed-market growth, namely Japan, the US and the Eurozone, steadily improves, albeit from very low levels. This may lead to a continuation in the shift in preference for developed-market investment opportunities as witnessed in recent months.
Huntjens says: “The shift in investor preferences are cyclical in nature, so at some point valuations and fundamentals will compel investors to return in force to Asian Debt particularly now that many global tail risks have reduced. Furthermore, Asian debt is increasingly well supported by Asian institutional and retail investors.”
ING IM believes that Asian currencies are not likely to receive such support on the whole given the shift in global growth dynamics away from Asia towards the US in addition to the Fed taper.  Some currencies are expected to outperform the USD, but on average, ING IM expects Asian currencies to weaken modestly based on spot returns. When considering the yields associated with certain currencies, last year’s laggards could potentially generate attractive total returns for investors that can stomach volatility with the leading candidate being the Indian rupee.
Alia Yousuf, lead PM of Asian Debt Local Bond, adds: “As portfolio flows move away from the region, Asian central banks are likely to allow their currencies to weaken in order to protect their reserves and improve the export competitiveness of their economies thus helping improve external balances. An improvement in trade balances should then lend support to the respective Asian currencies. Of course, one risk to excessive weakness in the currency is that the costs of goods imported increase putting upward pressure on domestic inflation. In that scenario, central banks are likely to raise policy rates, which would also support their currencies.”
In terms of portfolio positioning, ING IM’s hard-currency bond portfolios see better value in short-dated, sub-investment grade securities given higher yields and their low sensitivity to changes in USD yields. ING IM believes that high-yield corporate bonds offer more spread pickup than comparable bonds from other regions and lower interest-rate sensitivity, which gives way to the potential for attractive risk/reward dynamics. Furthermore, the economic backdrop is positive for corporates suggesting that corporate credit spreads could narrow.
Yousuf says: “In local-currency bond portfolios, we also favour higher-yielding bonds and currencies from countries with improving fiscal, growth and inflation profiles, such as India. Additionally, we find value in steep yield curves such as the Thailand local-currency yield curve. However, we are likely to remain underweight interest-rate exposure overall in portfolios in light of our expectation for interest rates to move higher.”

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