Joep Huntjens, Senior Investment Manager at ING investment Management, shares his take on Asian hard currency bonds.

Joep stresses that over 50% of the Asian hard currency bond market are corporate bonds; hence their performance drivers are the fundamentals of those corporates, and their fundamentals has been strong. On the other hand, Asian bonds pay a higher yield to investors than treasury bonds do as a compensation for its default risk; but fortunately, the default risk has been extremely low in Asia, notably none of the companies defaulted last year. Coupled with the strong fundamentals of Asian corporates, returns of Asian bonds are favourable. However, as this is a hard currency asset class, bonds are denominated in US dollar, so the return is also impacted by the movement in the US treasury bond rates.

For the countries to favour, Joep recommends sovereign bonds issued by Indonesia and The Philippines; especially in Indonesia, there is a clear improvement of fundamentals, and the country has been upgraded by the rating agencies to investment grade. Joep expects the same would happen to The Philippines in the next twelve months. On the other hand, the banking system in India is relatively weak and credit growth is relatively high. Also, the country's growth is slowing down rapidly, while inflation remains high. These negative fundamentals dampen the outlook for Indian bonds.

His favourite companies within Asia are oil and gas, where production cost are relatively low compared to that in the other parts of the world; and financials, where fundamentals are rather strong and investors are compensated generously for the additional risk in investing in the subordinated bonds. He avoid companies which are dependent on exports rather than on domestic demand, such as the shipping sector.

1. What are the factors driving the performance of Asian hard currency bonds?
2. Which countries and sectors would you favour and avoid?
3. Can you give some advices to investors who are keen to invest in this asset class?