Ask The Experts: Asian Corporate Bonds Offer Meaningful Pickup In Yields
Angus Hui, CFA, Portfolio Manager (Asian Fixed Income) at Schroder Investment Management, shares with Fundsupermart his views on the Asian investment-grade corporate bond universe and where he sees the best opportunities for this area.
Given the fund's focus on investment-grade debt, how does it provide meaningful returns to its investors?
- Objective of the Schroder Asian Premium Bond Fund is to provide capital growth and income from investing in investment-grade securities in Asia
- Current spread of 280 basis points above Treasuries for investment-grade corporate bonds in Asia presents a lot of medium-term opportunities
- Many investment-grade companies in Asia are fundamentally strong
- Inflation rates are also coming down for many countries, giving central banks more opportunities to use monetary policies and fiscal policies to support growth
- Banking sector remains resilient and corporate leverage has remained fairly low
- With low interest rates in many countries like Singapore, corporate bonds offer very attractive opportunities for investors
- Investment-grade corporate bonds in Asia also offer meaningful pickup in credit spreads against similarly rated US corporate bonds
How does the fund manage its currency exposure and how much does currency contribute to the fund's returns?
- The fund is denominated in SGD and the fund does not take on active currency risks
- Most of the issues in the fund's investible universe are denominated in USD
- Fund's USD exposure will be hedged back to SGD
- From a diversification perspective, the fund does find interesting opportunities in issues denominated in other currencies such as the RMB
- The fund currently has about 6% exposure to RMB-denominated offshore issues
Which area within Asia ex Japan investment grade debt do you see the most opportunities?
- Corporate bonds offer greater value compared to sovereign and quasi-sovereign bonds
- In terms of country allocation, the fund is positive on China, Hong Kong, and Korea
- For China, the fund likes state-owned enterprises with good business profile and strong government support
- In Hong Kong, new issues have pushed credit spreads wider, making it a good time to accumulate positions
- Fundamentals of Korean corporate bonds have fundamentally improved from 3 to 4 years ago, presenting some attractive opportunities
- Valuations are quite fair for Singapore corporate bonds with selected opportunities in the banking sector and government linked entities
Conversely, which area are you less positive on?
- Corporate fundamentals are relatively stable in Taiwan, Thailand and Malaysia but suffered from a lack of new issues over the past few years
- Hence valuations are getting more expensive
- From a portfolio allocation aspect, lower allocation to these countries
- India is the main source of concern with weak growth momentum
- India also faces tight domestic liquidity and risk of sovereign downgrade in six to nine months, hence credit spreads may face negative implications
- Thus less allocation to India in the portfolio at this moment
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