Europe’s crisis is chance to diversify to Asia, says Allianz’s Tan
Europe’s crisis is painful but is a “unique opportunity for European investors to diversify their portfolios,” according to David Tan, head of investments for Allianz Global Investors Singapore.
“In Asia there are good macro features and carry on the currencies and it makes sense to put it in your portfolios from a global perspective,” he told delegates to the German asset managers’ annual investor conference in Berlin recently.
Each year since 2004, a global debt portfolio including Asian bonds has had a superior risk/return profile to the same portfolio without Asia included, so the addition of Asian exposure has improved the efficient frontier of such a portfolio.
Pension assets are driving growth in the region’s bond markets – local currency bond markets showed 16.3% compound annual volume growth since 2005 – and now demonstrate a liquidity that investors can use as a reference point, he added.
Tan (pictured) said nations such as the Philippines, Indonesia and India all cutting rates pointed towards a more moderate outlook on inflation, too, which could otherwise erode returns from fixed income instruments.
Those returns in Asia, from yield, far exceed those of equivalent debt in developed markets.
As Germany and US 10-year debt seems to hit new, sub-2% low yields every week these days, long-dated debt in the HSBC Asian Local Bond Index made a total return of 3.9% this year to March, after 5% last year and 12.2% in 2010.
Chinese 10-year sovereigns yielded 3.44% at the end of 2011, India’s yielded 8.57%, Indonesia’s 6.03%, and Malaysia’s 3.7%, to take just a few examples.
Additionally, almost 80% of debt in the HSBC index is now investment grade.
Tan, whose team overseas €11.3bn in Asian regional bond markets from four countries there, added the $5.3trn the region has in foreign FX reserves – of which China commands $3trn – “bodes very well for the currencies appreciating, and provides room for expansionary policy.
“Policy rates are still above the 2009 lows, so there is the ability to bring rates down. Central banks and governments in Asia have the ammunition to combat global weakness if they need to.”
Fiscal deficits of Asian budgets are on average 2% to 2.5%, about one quarter that of the developed world, he added, and average public sector debt is 40.4% of GDP External debt is just 20.2%, excluding Hong Kong and Singapore..
On a macro level, intra-regional trade has picked up, making Asia less dependent on the US and Europe for its health, Tan added.