Ask the Experts: Asian Bonds In Better Position to Mitigate Risks In Europe
Low Guan Yi, fund manager at Eastspring Investments shares her take on Asian bonds under the current market conditions.
While some investors are concerned about the risks of investing in sovereign bonds due to the European debt crisis, Low Guan Yi believes that Asia is in a much better position because its debt-to-GDP ratio stands at lower than 60%, while for some European countries it's over 100% or even 200%. Moreover, the strong growth outlook for Asia is going to strengthen the region's position in the global market. Since Asian countries do not need to inflate the debts away or keep the currency weak to reduce debt burden, Asian central banks can pursue inflation targeting monetary policy.
Currently, her favourite country within the Asian bond markets is the Philippines, for its fiscal deficit is falling to 4%, and inflation has fallen below 4% while the 10-year bond yield is at 5%, which represents a very good value. Within the currency space, She favours the Malaysian Ringgit which she believes will benefit from the country's very strong current account surplus and the current rising trend in oil prices. Broadly speaking, she expects Asian bonds to deliver an average return of 6-7% this year.
In the near term, the biggest risk factor remains the European debt crisis. She expects that, should the European countries fail to contain the debt situation, it will give rise to a series of de-stabilising events in the global financial system and Asia cannot be immune from the risks. However, this is not the base case scenario but rather a tail event, and Asia having run-up FX reserves is in a good position to mitigate the effect like what they did last year.
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