Investors steered to developing markets
Investors of global fixed-income securities would do well to avoid low-yield developed countries in favour of developing markets with low valuations and forward thinking policies in order to pull a good return, says a bond expert.
Such a strategy entails avoiding Europe, Japan and the US, where bond yields range from 1-2%, in favour of developing markets with low valuations and a penchant for “orthodox policies”, adhering to anticorruption measures and rationality-driven fiscal and monetary policies, said Michael Hasenstab, executive vice-president and chief investment officer at Templeton Global Macro Fund, an investment unit of Franklin Templeton Investment.
He said a sizeable percentage of bonds the fund acquires in these developing markets carry a low or medium investment grade. For example, the company went to market in Colombia when bonds were trading at a heavy discount, and is now reaping the benefits as the government normalises public policies and invests in infrastructure after decades of conflict.
“Another good example is India, where the current and fiscal accounts are in order and there is an incredible reform agenda going on in terms of tax policy, bankruptcy and anti-corruption,” said Mr Hasenstab.
Aside from Colombia and India, the fund is heavily weighted toward Indonesia, Brazil, Mexico and Argentina. During times of political instability and economic volatility, Mr Hasenstab focuses on domestically driven factors such as high current account surpluses, which shield these markets from external risks.
“Argentina and Brazil are flipping towards ‘orthodox policies’ and are not highly correlated with US macroeconomic factors,” he said.
Franklin Templeton Investments’ Global Total Return fund, 85% of which is fixedincome instruments, has generated a return of 7.5% over the past 10 years, far ahead of the industry benchmark of 3%.
The fund pulled out of Thailand several years ago because of the generally low bond yields.
Although Thailand has a high level of resilience against external shocks, including sound monetary policy and a greater degree of domestic political stability, its bond yields are generally lower than those of its developing peers.
“The US policies do not have much of an impact on Thailand given the country’s strong trade relationships with its Asean neighbours, which are still growing at a 6-7% rate,” said Win Phromphaet, chief investment officer at CIMB Principal Asset Management.
Infrastructure is also an important factor in Franklin Templeton’s investment strategy, as it can boost growth and lower inflation.
Despite how massive infrastructure spending can deplete a country’s current account, such spending in developing markets has a long-term positive outlook, said Mr Hasenstab.
Thailand’s government, however, still has plenty of room to expand on infrastructure before its current account becomes a point of pain for investors, said Mr Win.
“The government has been trying to avoid spending in order to keep public debt at 40-45% of GDP, but I personally believe that infrastructure spending has been slow. A lot of investors have criticised the government for its low borrowing habits,” said Mr Win.
While Thai bonds may not be attractive for those looking for stellar returns, it is perceived as one of the safest markets in Asia.
“The return rate has remained at 1-2%, but funds have continued to flow into the country because alternatives like the Philippines and Malaysia have experienced a lot of instability lately,” he said.
Not much is set to change in the domestic bond market in the next two years, said Mr Win. The policy interest rate is expected to remain flat at 1.5%, with bond yields remaining stable at 2.5-3%.
As inflation picks up, there could be a modest growth in yields, but this growth will be constrained by strong demand for bonds, he said.