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Asia Bonds to Steal the Show as Region Gets Back to Business

Ruth Carson and Kartik Goyal
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Asia Bonds to Steal the Show as Region Gets Back to Business

(Bloomberg) -- Global trade frictions are back in the spotlight but Asia’s developing-market bonds will hold up well as the region leads the way in recovering from the coronavirus crisis, according to money managers.

As Asia emerges from a lockdown, consumption and investments are set to fire up again, reviving economies that bore the earliest brunt of the pandemic. South Korean debt and Thai securities are among those primed to do well, investors say.

Developing Asian bonds are at a crossroad after capping their biggest monthly gain in almost a year, with a resurgence in trade tensions threatening to undercut a rebound in exports. From China’s suspension of Australian beef imports to a U.S. ban on investments in Chinese stocks, recent headlines are reviving concerns of the protectionism which dogged global markets for the past two years.

Asia’s “economic disruption is going to be easier to fix, getting people back to work is going to be easier,” said Paul McNamara, a money manager at GAM Investments in London. “We’re quite positive on Asia just because we don’t think the world’s really realized just how much better Asia has done through this.”

Global funds are betting on developing Asian debt as the region takes aggressive steps to contain the pandemic and help their economies bounce back. Infections appear to have stabilized in China and South Korea while the number of cases in Taiwan is among the lowest in the world.

Regional bonds have fallen less than 1% this year, compared with a 5.8% decline in emerging-market debt, Bloomberg Barclays indexes show. Philippine securities and Chinese notes have outperformed Asian peers so far in 2020.

“Emerging bonds in the Asian region are particularly cheap,” said Hiroshi Yokotani, managing director and portfolio strategist for fixed income and currencies in Tokyo at State Street Global Advisors. “South Korea, Singapore and Taiwan bonds, to some extent, are attractive as these countries are prone to being affected by the IT cycle which seems to have hit bottom.”

Policy support has been crucial. Bank Indonesia purchased bonds directly from the government, while the Reserve Bank of India snapped up debt securities in the secondary market. China’s central bank has pledged “more powerful” policies to counter the fallout.

“We remain quite constructive on EM Asian bonds and have increased our duration positions over the past several weeks,” said Prashant Singh, senior emerging-market debt portfolio manager at Neuberger Berman. “Our preferred positions have been in markets where we still see scope for further monetary easing and where the reliance on external financing is relatively lower – like South Korea, Thailand and Malaysia.”

Trade Rift

But, some portfolio managers strike a more cautious note, with concerns largely centered around U.S.-China trade ties. President Donald Trump has cast doubt on the future of the phase one agreement, saying he’s struggling with Beijing in the wake of the pandemic.

“Some level of trade renegotiations are inevitable as it is extremely unlikely that China can fulfill its pledges on buying various American goods” due to the fallout from the pandemic, said Karan Talwar, senior investment specialist for emerging-market debt at BNP Paribas Asset Management in Hong Kong. “As the U.S. approaches its general election, the situation could get further politicized and hence is something to pay close attention to.”

Washington has also blocked investments in Chinese stocks by the Federal Retirement Thrift Investment Board. Separately, China suspended meat imports from four Australian abattoirs this week.

“The global economic recovery could turn out to be bumpy and the time line more drawn out,” said Duncan Tan, a rates strategist at DBS Group Holdings Ltd. in Singapore. “Over a 12 to 24-month horizon, South Korea and Singapore bonds are likely to be more resilient due to greater fiscal flexibility and stronger external funding fundamentals.”

Haven Status

But for some money managers, Asia is a relative haven amid the volatility.

“The fiscal resources that Hong Kong, Taiwan, South Korea and Singapore have at their disposable and generally sounder fundamentals mean that Asia is already far ahead,” said Kenneth Akintewe, head of Asian sovereign debt at Aberdeen Standard Investments. “Given the uncertainty ahead, the importance of being allocated to a region underpinned by more robust fundamentals couldn’t be greater.”

(Adds State Street’s comments in seventh paragraph)

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