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Asia Bond ETFs Vulnerable as Corporate Debt Builds


As Asian private sector debt levels rise to 1997 highs, investors may want to watch out for potential risks in emerging Asia bond-related exchange traded funds.

The combination of high leverage, with emerging Asia debt more than doubling to $21 trillion over the past five years, and notoriously low liquidity in emerging Asia could weigh on Asia debt when the markets turn sour, reports Henny Sender for Financial Times.

Investors may want to keep tabs on he WisdomTree Asia Local Debt Fund (ALD) , an actively managed ETF that tracks local debt denominated in currencies of Asia Pacific ex-Japan countries. ALD has gained 4.1% year-to-date. [ETF Spotlight: Active Asia Debt]

Additionally, other broad emerging market bond ETFs include significant Asia exposure. For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) has a 4.5% weight in China, 5.3% in Indonesia and 5.5% in the Philippines. [EM Bond ETFs Firm as Issuance Soars]

The region has been able to support its high debt burden, with large foreign capital inflows and current account surpluses.

However, market observers have pointed to an end of easy money from the Federal Reserve and heightened global volatility, which have weighed on emerging market debt and their respective currencies since the July high.

Some also argue that corporate Asia is more vulnerable than sovereign debt since many Asian companies have benefited from the Fed’s near-zero rate policies, which will likely end soon.

Furthermore, exports are growing at a slower rate for many countries in the region, especially in China where the government is shifting over to a domestic-driven economy. Meanwhile, U.S. companies are spending less on equipment and technology, weighing on Asian countries that manufacture and export the tools.

“Emerging Asia’s foreign liabilities are now higher as a share of exports than any time in the last 10 years,” Jahangir Aziz, an economist for JPMorgan, said in the article, adding that there is “increased potential for currency mismatch in the private sector. Corporates are directly exposed to FX shocks.”

WisdomTree Asia Local Debt Fund


For more information on Asia, visit our Asia category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.