Although Asian fixed income has seen capital outflows over the past few months, there are still pockets of opportunities in this market.
Citywire + rated Endre Pedersen from Manulife Asset Management believes attractive opportunities can still be found from three sources of return: interest rates, credits and currencies.
He said investors should review their average portfolio duration and marginally increase average duration where appropriate in view of the higher interest rate expectations.
‘We still hold a positive outlook for both the Indonesian and Indian markets due to their strong economic fundamentals and sound fiscal management policies,’ the chief investment officer for Asia (ex-Japan) fixed income explained.
Aside from Indonesia and India, Pedersen said he also sees value in certain segments of the Chinese bond market, particularly at the shorter-end.
‘Within that space, we have a positive view of property developers, state-owned enterprises in the energy, industrials and utilities sectors and policy-bank debt offerings,” he added.
While nominal interest rates are rising in the region, real interest rates for many countries remain below 2016 levels, Pedersen said.
This suggests there is potentially more room to use interest rates as a tool for increasing economic growth without inducing inflation or capital outflows.
He said the People’s Bank of China is expected to maintain its neutral policy bias, which should continue to provide support for the country’s onshore bond market.
Longer-end refinancing activities in China, on the other hand, could heat up in the second half of 2018.
What’s more, a mean reversion for Asian currencies could also take place if the existing dynamic for currencies continues into the coming months, Pedersen said.
In recent months, the strengthening US dollar, which has had an impressive run since mid-April, has negatively impacted Asian currencies.
Asian fixed income has experienced a substantial repricing of risk since early 2018 in view of the spreads widening and increasing credit differentiation.
The Manulife Investor Sentiment Index for fixed income also dropped from 36 points in January to 28 points in June.
Pedersen is the portfolio manager for Manulife Asia Pacific Investment Grade Bond fund, which is registered for sale in Singapore.