The start of 2015 has been rather nerve-wracking for investors with geopolitical headwinds combining with an ever-changing monetary policy backdrop.
Continuing tensions over Russia, the dramatic fall in the price of oil and slowing global growth are all issues investors have had to contend with over the end of 2014 and into the New Year.
Looking more closely at bond investors, they have had to make plans with a looming rise in US interest rates due in the second half of this year, as well as increased stimulus action in Europe and Japan.
With that in mind, Citywire Asia spoke to two bond managers, Ariel Bezalel, who manages the Jupiter JGF Dynamic Bond fund, and Endre Pedersen, fixed income CIO for Asia ex Japan at Manulife AM, summarise the key risks global and Asian bond markets will have to navigate in 2015.
1. Higher than expected rates could trigger Asia outflows
The consensus points to a interest rates rising in the US in 2015 but the speed of the change will provide headaches for investors, according to the fixed income specialists.
‘In particular, if we were to experience a rapid rise in interest rates and concurrent higher US treasury yields, we could witness outflows from Asian bond markets, though this would not likely be on the same scale as that witnessed in the "taper tantrum" of 2013,’ said Manulife’s Pedersen.
‘In the year ahead, we believe investors should consider maintaining a relatively short interest rate duration, overweighting carefully selected credit issuances, which offer higher spreads – including sub-investment grade or high-yield credit – and favouring hard currency bonds,’ he added.
2. Geopolitical risks will continue to plague markets
This year, bond investors will also have to pay attention to key political events, both in terms of elections and ongoing inter-country tensions. While 2014 saw a slew of important political changes in Asia, including in India and Indonesia, this year, Europe will also be facing a degree of political uncertainty.
'While the UK economy is growing nicely, elections later this year will lead to some uncertainty for the markets,’ said Jupiter’s Bezalel. ‘After the Greek elections, Spanish elections later this year will also bring about some uncertainty,’ he added.
In addition, geopolitical events in Ukraine and the Middle East, as well as border disputes within Asia, are idiosyncratic risks but cannot be ignored, according to Pedersen.
3. China slowdown to have an impact
One of the bigger worries for Asian investors will be the slowdown in Chinese growth. ‘Investment has slowed as a percentage of GDP, now we think the Chinese consumer is about to roll over as well,’ said Jupiter’s Bezalel. ‘The country that will bear the biggest brunt of China’s slowdown is likely to be Australia.’
‘As a result, there is a lot of pressure to cut the interest rate, and fairly aggressively at that, in Australia,’ he added. He said he is buying medium and long-dated Australian government bonds while hedging the currency. ‘It has been a great trade over the past six to seven months and we see more upside,’ he added.
Manulife’s Pedersen also said, within the interest rate markets, Australian 10-year government bonds currently offer the highest AAA-rated yield in his opinion.
4. Impact of sharp drop in oil prices
The US high yield (HY) market is likely to experience the impact of the dramatic fall in oil prices, according to Jupiter’s Bezalel, especially since energy bond issuers account for 15-20% of the US HY market.
Emerging markets such as Russia will continue to be volatile, although some markets such as India and Indonesia (net oil importers) could likely benefit.
However, a strengthening US dollar will weigh on EMs as a whole. ‘The strength of the dollar will continue to impact emerging market corporates that funded themselves with dollar-denominated debt,’ added Bezalel.