Asian bonds and currencies face some short-term risk of a fall-out of the ongoing Greek debt default crisis, according to a Matthews Asia income specialist.
‘Whether we like it or not, the world is very interconnected and you can see some impact of Greece on Asia,’ Citywire AA rated Teresa Kong, fund manager of the Matthews Asia Income Strategy fund, told Citywire Asia. ‘The Greek crisis has definitely caused some shift away from riskier assets.
'Over the medium and long term, however, Asia will continue to be the most insulated region among all emerging markets, especially compared with emerging Europe or Latin America. This is due to the relatively lower risk or beta of the region and the lower historical correlation to riskier assets, when compared with LatAm or the EMEA region.'
In terms of overall credit spreads, Kong noted that on a short-term basis, credit spreads have widened somewhat.
'That has been driven by investor hedging, as they look to protect their positions in terms of what the outcomes for Greece might be,’ she said. But the widening has been benign when compared to LatAm or EMEA, reflecting the relative higher credit quality of Asia.'
Kong noted that the Greece crisis, while a long time coming, definitely has short-term ramifications. ‘It is like a slow train wreck and no one really knows how this will play out.’
‘I do think we are in unknown territory with the issue of a possible “Grexit”. It is not clear what the end game is for Greece. If the path forward is more austerity and continued polarisation of politics, we might get through one more round, but the underlying cause will not have been fixed, which is that the EU has monetary union without a fiscal union.'
‘I think that until that problem is resolved, it will continue to be a problem for the market,’ she added.
Fed hike delay?
The Greek imbroglio could also lead the Fed to delay its highly-anticipated interest rate hike.
‘The Fed is under a lot of international pressure to delay the Fed hike; while the US economy is certainly the key driver, I think Greece is a consideration in that equation,’ she said.
She noted that the timing of the rate hike did depend on overall market conditions, and that it is unlikely for the US to take a decision on that front independently of what is happening in other parts of the world.
‘While international issues are not the primary concern, it is certainly part of the equation,’ Kong said, adding that she did not expect the Fed to hike rates this year.
Counting on convertible bonds
She said in terms of current opportunities, she had increased weight of convertible bonds in her fund's portfolio. We have seen several companies whose bonds still provide attractive potential return given some are trading at or below the bond floor,’ pointed out Kong.
‘Given our focus on credit research, we can determine what our downside is, and also capitalise from the upside potential from any rally in equities.'
She said that the allocation to convertible bonds in her fund ranged between 15-20%, compared with 5% a year ago.