BlackRock is positive on Asian credit for 2017 despite near-term risks because of Asia's income needs, Neeraj Seth, head of Asian credit has said.
Outlining his views in an investment outlook for 2017, Seth said: 'We have a broadly positive view on Asian credit fundamentals going into 2017.
'Valuations remain attractive relative to traditional fixed income assets, supported by a good technical backdrop.'
But he is cautious in the near-term till US president-elect Donald Trump clearly defines his policies.
The shift to fiscal policy has implications for U.S. rates with a steeper yield curve, assuming a gradual Fed hike, although it is important to note that the 10 year UST yield is currently higher by almost 90bps from July’s bottom point, Seth added.
'Faced with ageing populations and the continued need for safe income from Asian as well as global investors, we expect demand for Asian credit to remain strong, while the maturity profile remains well spread over the coming years and manageable going into 2017,' he said.
'We would expect returns to be primarily from income in 2017 - potentially in the 4-5% range - with some downside risk from a US Treasury sell-off, while credit spreads are expected to remain stable (with potential for some spread tightening, depending on how the market develops between now and year end).
'In terms of the local currency bond markets, we remain selective in terms of the opportunity set and we like the local markets with macro stability and potential for further monetary easing.'
The asset manager is focusing on credits with strong standalone credit profiles in China, and in India, he prefers investment grade credit.
In Indonesia, he has a preference for quasi-sovereign credit.
BlackRock is positive on Asia for next year because of reflation signs and nominal growth recovery in China, the head of Asian equities, Andrew Swan, said in the outlook.
Swan said: 'The currency adjustments seen last year have allowed many countries to experience a structural improvement in their capital positions, allowing for more FX stability and increased scope to reduce interest rates.
‘In addition, as the efficacy of monetary policy is fading, especially in developed markets, we expect policymakers will be leaning towards fiscal stimulus as their main lever. This may provide the growth impetus that can unlock some of the extreme value we currently see in Asia.
For Asia, the key near-term risk is a continued strengthening in the US dollar which puts potential issues such as renminbi devaluation risk back on the table as well as allowing less policy flexibility amongst Asian central banks.
His preferred countries for 2017 in Asia are India and Indonesia because of cyclical recovery in growth and a pick-up in GDP.
Neutral on China
BlackRock is neutral on China overall.
‘We have been invested in both “old economy” state owned enterprises, such as energy & materials stocks, as well as “new economy” and consumer sectors, such as internet and health care.
‘We remain positive on Macau as sector revenue growth has turned from a multi-year downturn back to positive territory. Volumes and traffic in the mass market is demonstrating strong positive momentum at the same time supply of new casino projects is limited.’
The continued slowdown in the tech and smartphone cycle has meant that being underweight the sector as well as having underweight exposures to Korea and Taiwan have paid off.
‘However, we have also been rewarded by being selective, especially in Taiwan, where we have been underweight the sector and therefore underweight the market, and have invested in companies which we believe are leaders in their niche industries.’
Tencent is the top holding in his BGF Asian Dragon fund at 5.83%, as of 31 October. Samsung Electronics is his third largest holding at 4.18%.