Opportunities shift to Aussie and Asian bonds

There are opportunities for Australian investors in Asian and Australian bonds, which currently offer less volatility and potentially higher returns than large developed bond markets, according to Legg Mason affiliate Western Asset.

Asian and Australian bond markets were also buffered from other global risks such as a potential double dip recession in the US and EU sovereign risks, and already proved this resilience with a strong performance during a global sell-off in late 2008, according to Rajeev De Mello, head of Singapore fixed income at Western Asset.

Improving fundamentals in many Asian markets meant perceived risks such as illiquidity in those regions often no longer applied, and many bond indices had now been created that offered ready access to these markets, he said.

China’s decision to relax policy around the valuation of the Yuan added to the appeal of Asian bonds as a currency play, with China’s exchange rate regime now likely to lead to faster appreciation of Asian currencies in the medium to long term, he said.

“Foreign ownership of local currency bonds across Asia has already begun, with around 27 per cent of Indonesia’s bond market held by foreign owners. Singapore has around 20 per cent, while Thailand has less than 10 per cent, but China and India have less due to entry barriers for foreign investors”, De Mello said.

Many foreign corporates were now issuing long-dated bonds in the Australian investment grade market, bringing Australia into the ‘big league’ of bond issuers like the US, according to Western Asset Australia’s head of investment management, Anthony Kirkham.

“Australia is now becoming a destination of choice for corporate bond issuance and we predict many more entrants will come,” he said.

Investors should target a fixed interest fund that offers a diversified selection of companies and sector allocations when looking to invest in Australian bond markets, he said.

“It is also important to look for stable returns, and having a globally integrated research capability helps,” Kirkham said.