Technicals continue to drive Asian investment grade bonds as a building block in the portfolio

  • 08 May 2018

    Much is made of the fundamental strength generally found in Asia and of the yield/spread pickups investors can find in the region compared to opportunities elsewhere. While those fundamentals and relative value propositions are present for Asian investment grade (IG) bonds, they are not why we expect the asset class to be supported over the coming quarters and years. Instead, our constructive thesis on Asian IG is primarily built on technicals, which has both a supply and a demand side component.

    Supply Side

    1. Hitting $1 trillion will be an inflection point

    The Asian IG market has tripled in size over the last five years. Today, the market stands a bit larger than $600 billion, and we estimate it will reach $1 trillion by 2020. At $1 trillion, we expect to see increased sell-side coverage and increased consultant endorsement. Greater coverage will lead to even greater investor participation.

    Growth in Market Value

    Source: Fidelity International, ICE BofAML Bond Index (ADIG), as at 28 February 2018. Market value projection: Fidelity estimates.

    2. Risk-reward tradeoffs will improve as the market grows

    Since 2010, the number of issuers in the standard index has jumped from ~200 to ~800. Over the same time, diversification has improved as well. While a couple of sectors each represented over 20% of the market in 2010, today that distribution across sectors is much more uniform. Growth also brings new issuance which often comes from first-time issuers and offers investors attractive premiums.

    Demand Side

    1. China onshore demand will be significant

    The general RMB devaluation has led to a notable increase in USD deposits in onshore Chinese banks. Chinese banks, in turn, look to invest these proceeds and favor debt from issuers with whom they have familiarity -- namely Asian issuers. While the RMB will increasingly trade in both directions as the Chinese economy continues to open, we expect a consistent and substantial pool of dollar deposits which will be invested in Asian IG bonds.

    2. European institutional demand will be meaningful

    The yield dilemma is as present in Europe as it is anywhere. The disparity between particularly low yields in Europe and those in Asia provides a natural incentive for investors to consider an allocation to the latter. European investors have been participating in 10-20% of the new issuance coming out of Asia. We see absolute levels of participation to increase, which, from a large buyer base will provide considerable support for the Asian IG asset class.

    Why Fidelity?

    Fidelity is a leader in Asian fixed income. With analysts on the ground, connected research insights across equity and fixed income and a focus on superior risk-adjusted returns across our range of products, Fidelity can help you discover the potential of Asian fixed income.