THE ASIA FACTOR

IN AN INCREASINGLY UNCERTAIN INVESTMENT CLIMATE, WHAT BENEFITS CAN ASIAN BONDS OFFER INVESTORS?

IN JUNE 2018, the US Federal Reserve announced an interest rate hike, adding a further 25 basis points from 1.75 to two per cent. This was the seventh rate hike since December 2015 till June this year, and observers are forecasting another one or two hikes this year (with potential further increases for 2019 and 2020). While the continuing rises may be gradual, other bodies such as the European Central Bank have expressed their intention of following suit in the future.

The prospect of further tightening policies may dampen enthusiasm for fixed-income assets such as government bonds; however, it’s worth noting that inflation across most of Asia has remained low, and interest rate hikes are expected to be gradual.

Such interest rate hikes and higher inflation in the US have pushed bond yields higher, but not all bonds have suffered as a result. One possibility for savvy investors preparing to navigate the challenging markets in a rising rates environment is Asian bonds.

Manulife Asset Management, a premier global asset manager with an extensive on-the-ground presence in Asia, offers a comprehensive portfolio of Asian bonds and funds for investors of all levels.

The diversity of opportunities in Asia makes it an attractive proposition for investors. Economic reforms in countries such as Indonesia and India have led to greater growth and financial market deepening. As investors in developing Asian economies over the past decades have found, taking the long view can pay handsome benefits.

Indeed, although both countries have historically run current account deficits, each has made strides towards greater fiscal sustainability. Indonesia’s streamlining of foreign investment procedures in recent years has resulted in increased levels of direct investment. Similarly, India’s key tax reforms to boost government revenues and robust economic growth have notably improved its economic profile.

China has also emerged as the secondlargest economy in the world, with a bond market that stands as the third largest behind only the US and Japan.

The prospect of increased protectionism and further trade friction is a cause for concern. However, the development of a large local investor base should potentially mitigate some of its impact on Asian bonds. With many regional markets driven by robust domestic demand, Asia is well positioned in the global economy.

As such, international investors would be wise to consider increasing exposure to Asian bonds. Improved fundamentals resulting from strengthening economic growth, moderate inflation and healthy fiscal balances mean Asian credit remains a compelling option for investors.