All the recent talk of a downturn in the global economy, sparked by fears that the US is going into recession, may not be such good news for Asian equity investors if a downturn results in a decline in exports. However, careful examination of what's on offer in the bond markets could prove beneficial. That, at least, is the verdict of ING Barings credit research teams.
At a presentation given today at its Hong Kong office, the bank asserted that Asia's financial system shows good fundamentals, including a large savings surplus and the prospect of upgrades in ratings. As a result, investors can find real value, particularly in US dollar denominated credits.
"The year-to-date outperformance of Asian eurodollar bonds should continue thanks to Asia's strong macroeconomic fundamentals and demand from local investors searching for higher yielding instruments," argues Tim Condon, ING's chief economist.
"Clearly this is a year for bonds as they're outperforming stocks," Condon adds. "The effects of deflation haven't had such an effect in the fixed income market, but from an equity point of view, this doesn't make for exciting times."
Damien Wood, head of credit research argues that many banks heeded the lessons of the Asian crisis and investors can find value in bank debt. "Since the crisis in 1997 and 1998, banks have been rebuilding; non-performing loans (NPLs) continue to fall and banks are flush with cash," says Wood. "Investors are struggling to find places to invest and banks find it difficult to find people to lend to. This is positive for those looking at bank debt because there's a good credit story behind it.
"We believe Asian high grade bonds present steady returns for relatively low risk," Wood continues. "The risks may seem high but the chances of Asian banks going into liquidation are very low. We expect total returns in US dollars for most Asian high grades to range from 6% to 11% over the coming 12 months."
Among the best picks in the secondary market for high grade paper, according to the bank, include past issues from DBS of Singapore, the Korean Exchange Bank, PLDT, Hutch and Kepco.
Buyers of high yield bonds may see an even bigger pick up, although Wood expresses some caution for this paper. "While investors should be selective in this sector, we see China infrastructure, Thai and Philippine telecoms, and Korean bank subordinated debt all offering attractive investment opportunities," he says. "We expect total returns from these sectors to be between 19% to 24% over the next 12 months."
