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Even With Trade War, Asia Bond Investors Sleep Better at Night

Asian securities are outperforming emerging-market peers.

Even With Trade War, Asia Bond Investors Sleep Better at Night
The portrait of Mahatma Gandhi is displayed on an Indian 50 rupee, left, and 2000 rupee banknotes in an arranged photograph in Bangkok, Thailand. (Photographer: Brent Lewin/Bloomberg)

(Bloomberg) -- Bond investors are keeping their faith in Asia, a region they view as being relatively stable even as an escalation in the trade war threatens to dent global growth.

Asian policy makers have more capacity to support the region’s economies, with inflation running below targets meaning that central banks can cut interest rates if needed, according to Aberdeen Standard Investments. Opportunities can be found in countries such as China and Papua New Guinea, where reforms to open up their markets to foreign investors are taking place, NN Investment Partners said.

“Asia is where you’ll sleep a little better at night,” said London-based Edwin Gutierrez, who manages $14 billion as head of emerging-market sovereign debt at Aberdeen. He favors local-currency debt in India and the Philippines as they are less directly hit by the trade conflict. “The markets are supported by low inflation and the fact that Asian central banks have a lot of flexibility to ease monetary policy.”

Demand for Asia’s relative safety comes as investors soured on riskier assets on the back of rising odds of a full-blown trade war between the U.S. and China. President Donald Trump earlier this month delivered on his threat to more than double tariffs on the Asian country, and Beijing responded that it’s been forced to retaliate.

Below are three charts that show why Asian debt remains appealing:

Even With Trade War, Asia Bond Investors Sleep Better at Night

Local debt issued by emerging Asia with currency hedges handed investors a return of 1.0% since May 3, as Trump began ratcheting up pressure with plans to raise tariffs on Chinese goods, a Bloomberg-Barclays index shows. That compares with a 0.4% gain in a measure tracking similar debt across global emerging markets.

Even With Trade War, Asia Bond Investors Sleep Better at Night

Asia’s domestic debt is attractive because the region is ahead when it comes to the monetary-easing cycle compared with Latin America, Aberdeen’s Gutierrez said, adding that he’s looking to add Indonesia local currency government bonds on any sell-offs. Most of the central banks in South America have just paused in raising rates, so it would take them longer to introduce stimulus again, he said.

Malaysia and the Philippines have cut their benchmark rates since the first weekend in May, while other emerging markets including Brazil, Chile, Peru, as well as Mexico have left their policy rates unchanged.

For Gutierrez, the risks for local-currency bonds lie in their currencies, which have been hit by the trade spat. Four of the 10 worst-performing emerging-market currencies since May 3 are from Asia.

“The rates story is a lot cleaner than the FX story,” Gutierrez said. A further deterioration in the trade dispute will likely prompt more stimulus measures from Asian policy makers if it starts to take a toll on Chinese growth, he said.

The weakness in Asian currencies may not persist for long especially if Chinese growth improves in the second half of the year as stimulus measures kick in, said Prashant Singh, a senior portfolio manager in Singapore at Neuberger Berman. He currently has an underweight stance on the region’s exchange rates but is positive on their local-currency bonds as inflation is low in many countries and central banks may cut rates to support growth.

Even With Trade War, Asia Bond Investors Sleep Better at Night

Emerging Asia’s hard-currency bonds are withstanding the market turmoil, with a gain of 0.4% since May 3, compared with an overall increase of 0.1% in global emerging-market dollar bonds, JPMorgan Chase & Co. indexes show.

Asia remains a “core investment” for Leo Hu, NN Investment’s senior portfolio manager in Singapore for hard-currency emerging-market debt. Reforms are continuing in China, which is opening up its financial markets, and in Papua New Guinea, where laws are being strengthened to encourage foreign investments, he said. The investor also favors Pakistan, which will be under an International Monetary Fund program.

Read here how Asian economies are to dominate the 7% growth club during 2020s

“It’s more about high-quality growth,” said Hu, who helps oversee about $10 billion of emerging-market debt. “It’s about reforms. Even the trade tensions between the U.S. and China, it’s about China implementing reforms. Although the process to get there could be very painful, eventually on a medium-term trajectory, reforms are very helpful.”

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Denise Wee in Hong Kong at dwee10@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, ;Andrew Monahan at amonahan@bloomberg.net, Ken McCallum

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