Asian debt now a mainstream asset class, says Western Asset
Investors should view Asian debt as a mainstream asset class and not simply as a subsection of the global bond universe, according to Chia-Liang Lian, manager of the £737m Legg Mason Western Asset Asian Opportunities Fund.
Lian says Asian debt has gradually established itself as an asset class in its own right in recent years, although investors have yet to assess the region’s paper accordingly.
“We no longer view Asian debt as a peripheral part of the emerging market universe that merely acts as a supplement to global bond exposure, as was the case 20 years ago,” he says. “Investors should take a step back and consider the longer-term attributes of Asian debt as an asset class.”
A potential corollary of this shift in perception, says Lian, is that investors would be compelled to reconsider the relevance of indices for strategic allocation. He says global bond indices traditionally tend to be heavily weighted towards developed markets, particularly to the West as well as to Japan. But, while this was once consistent with each region’s respective share of the global economy, Lian says the shift away from the G7 in recent years has yet to be reflected in many benchmarks.
“In the three decades prior to 2000, the pattern of the world economy was very stable, with separate episodes of economic stress exerting only temporary and minor knock-on effects on the G7 economies,” he says.
“However, in the last 10 years, there has been a striking change in trend and, if you look at the respective positions in terms of share of world GDP, the G7 has declined from roughly two-thirds to about half. Yet the weights assigned to emerging Asia in global benchmarks including Citibank’s WGBI are currently less than 3%, which shows a clear disconnect between the economic reality and the benchmark weightings.”
Furthermore, the trend away from the G7 comes at a time when sovereign rating trajectories are demonstrating a similar divergence, says Lian.
“A decade ago, just three of the 10 largest Asian economies were rated A or above by S&P,” he points out. “Today this ratio has doubled to six, with Hong Kong and Singapore rated AAA.
Meanwhile in Western Europe, where countries were uniformly rated A or higher 10 years ago, ratings are now distinctively more mixed and even the best quality sovereigns are now vulnerable to downgrades as we’ve seen in the last couple of weeks.” As Asian economies outpace developed countries by about 6% on average over the past decade, there has been significant build-up in external surpluses across the region.
“These surpluses have meant many Asian countries are now key exporters of capital to the rest of the world, with the resulting accumulation of reserves acting as a form of self-insurance in periods of exogenous pressure,” he says. “It is no surprise that compared to earlier years, the recent market volatility in Asian currencies has declined noticeably, precisely because policymakers are now more adequately equipped to minimise unintended currency fluctuations due to external forces.”