Press release

Asian fixed income remains an attractive asset class for 2012

Fixed income assets in Asia and other emerging markets will prove to be an ideal investment vehicle in 2012, but the year ahead will contain threats as well as opportunities for those seeking returns in a volatile global economy, says Andrew Wells, the Global Chief Investment Officer for fixed income at Fidelity Worldwide Investment.
  • Investors expected to raise their Asian investment profile through fixed income
  • Asian fixed income offering higher level of income and lower level of volatility than Asian equities
  • Emerging market bonds becoming a structural, rather than a tactical, allocation
  • 2012 will be a year of threats and opportunities in bond markets

 

HONG KONG, 14 December, 2011 – Fixed income assets in Asia and other emerging markets will prove to be an ideal investment vehicle in 2012, but the year ahead will contain threats as well as opportunities for those seeking returns in a volatile global economy, says Andrew Wells, the Global Chief Investment Officer for fixed income at Fidelity Worldwide Investment.

He says investors will come to the realization that they need to adapt to a changing fixed income environment by recasting their established ideas about the nature of risk. The realisation that some of the largest risks in the bond universe reside in what was seen as the lowest-risk end of the spectrum is a watershed moment. 

 “2012 will be a year of threats and opportunities in bond markets and nimble fund managers can take advantage of situations where investor sentiment becomes detached from the fundamentals,” Mr Wells says.  

Asian and emerging market bonds favoured
Mr Wells says Asian fixed income remains a preferable asset class in the year ahead as it offers a high level of regular income and lower volatility than Asian equities.

“Investors are moving from Europe and the US into Asia and other developing markets. The growth rates in Asia are better and we have seen net inflows into our Asia business,” he says.

“We see a lot of people looking to invest in Asia. Even equity investors are seeking high yield.”
As an asset class, Asian fixed income has achieved some maturity, underscored by higher benchmark sizes, improved diversity, more liquidity and better track records.

Mr Wells says 2012 will see investors give much more weight to the idea of emerging market bonds being a structural, rather than a tactical, allocation in their portfolios.

Emerging market economies are forecast to deliver the strongest growth rates, which gives sound underpinnings to their sovereign credentials. Indeed, the debt and budgetary positions of many emerging market countries is now far superior to those of many developed countries.

“Sharp drops in risk sentiment that leads to rises in the government bond yields of well-managed, fiscally responsible emerging market countries could present opportunities for income-seeking investors. Similarly, emerging market inflation-linked bonds offer attractive real yields; inflation is higher than in the West, but this likely to be more than compensated by robust growth,” he says.

European volatility 
Mr Wells says Europe is entering a period of low growth and there have been significant outflows from the Eurozone in particular due to the problems associated with the sovereign debt crisis.

Investors have started to shun Eurozone bond offerings, even in strong economies such as Germany. There is growing concern that Europe’s monetary union is under pressure because of deteriorating market sentiment and the large amount of public debt in the region.

Mr Wells says the volatility is unsettling for some investors who are reassessing their tolerance to risk.


Fixed income is the place to be in 2012
Sovereign defaults will remain the major concern for markets in the year ahead.

Mr Wells says the environment for investing in fixed income is about making sure investors have exposure to the right governments, corporates and high-yield debt, as well as adequate protection against inflation.

Turning to individual bond classes, Mr Wells says investor demand for government debt of countries deemed to be ultra-safe such as the US, the UK, Canada and Australia has risen. “With the ability to print money in their own national currencies, these bonds are considered to have low default risks by investors. However, the low yields on offer make them less attractive for investors searching for yield.”

High-quality investment grade corporate bonds can offer many of the characteristics once associated with sovereign bonds. “Generalised macro concerns have served to push up yields in corporate bonds across the whole credit spectrum, but crucially this has occurred while company fundamentals have remained basically sound. In reality, many companies are now in a better position than their governments.”

Despite carrying more risk, Mr Wells says a case can be made for high yield corporate bonds for investors prepared to take a longer-term view.  “Dislocation in financial markets periodically pushes the prices of high yield bonds to ‘distressed levels’, which do not reflect company fundamentals.”

“In reality, most companies enter 2012 in much better shape than they did in 2008/9. They have kept their cost bases under control; they continue to have access to bank lending, even if terms have become tighter; and they have actively managed their own refinancing needs in the past two years to protect themselves from volatility. These factors should contain default rates at lower levels than the market appears to be discounting,” he says.

– Ends –

About Fidelity Worldwide Investment

Fidelity Worldwide Investment is a global leader in asset management, providing investment products and services to individuals and institutions in the UK, continental Europe, the Middle East and Asia Pacific. Established in 1969, the company has over 5,000 staff in 24 countries and manages or administers client assets of US$207.9bn. It has over 7 million customer holdings and manages more than 740 equity, fixed income, property and asset allocation funds. The company’s fund managers receive research from one of the largest proprietary research teams, based in 12 countries around the world. Fidelity Worldwide Investment is an independent asset management company which is privately owned.

*Data as at 30 Sept 2011

 

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Tomoko Aikawa 

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Email: rowena.kwok@fil.com

 

Email: tomoko.aikawa@fil.com