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Trends – Institutional Monthly
Asian corporate bonds: Attractive for yield-seeking investors

30.11.2015

We believe that weak commodity prices, attractive valuations, relatively short duration and Asia’s relatively stronger growth outlook mean that Asian corporate bonds should continue to outperform.

Trends – Institutional Monthly

Global growth concerns, a drop in inflationary expectations, a delayed rate hike by the US Federal Reserve and continued easing by the European Central Bank and the Bank of Japan are all factors which point to 2016 being another challenging year for fixed income investors. In the hunt for yield, government bonds and many high grade bonds in the developed world simply no longer fit the bill. So what can investors turn to?

We think that the answer lies in Asia – and, more specifically, in Asian corporate bonds issued in US dollars. Adding Asian hard currency corporates to a portfolio can increase stable income while enhancing diversification.

Commodity weakness plays in Asia’s favor

Many people still categorize Asia in the broad emerging markets basket and expect a slow, labored recovery with low inflation to be problematic for the region. Low commodity prices may also hurt some emerging economies given they are exporters. However, with a lack of their own natural resources, many Asian countries are big energy importers, even more so in recent years as they look to fuel and maintain the growth in their economies. The current low oil and commodity prices will therefore actually help reduce Asia’s energy import bill, and increase its trade balance. Fiscal deficits will also be reduced, given the large part fuel subsides still play in the region. All of this has combined to keep inflationary pressures in Asia low, though currency weakness will negate these to a certain extent. Overall, central banks will continue to have the flexibility to keep monetary policy supportive, if need be.

With so many positives for Asia, one of the best ways for investors to benefit is through Asian corporate bonds. In broad terms, the Asian fixed income market remains largely on trend, growing in size, sophistication and depth. It continues to attract investors, driven by strong sovereign and issuer fundamentals, low default rates and attractive yields relative to the USA and Europe. An allocation to Asian hard currency corporates also helps improve diversification and reduce a portfolio’s overall risk, given its lower volatility and, in turn, better risk-adjusted returns.  

In this issue:

• Investment strategy and asset allocation: Low yield environment remains biggest challenge

• Alternative ideas: Constructive outlook for European real estate

• Food for thought: Credit Suisse Global Wealth Report

To read the full article download the latest "Trends – Institutional Monthly" (PDF) 

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