Since early 2020, the COVID-19 pandemic has upended economic, commercial, social and investment activities around the world. Amid travel bans, stay-at-home orders, and supply-chain disruptions, the global economy has endured a crisis that is unique in the modern period. In response to 18-plus months of pandemic, national governments – and the US federal government in particular – have delivered unprecedented fiscal and monetary stimulus. The economic disruption and government relief in the form of readily available, low-cost cash have driven equity markets to new, often volatile heights, kept bond yields down, and reintroduced the prospect of high inflation for the first time in a generation. So far, national governments have managed to keep their economies afloat, albeit unevenly, and to chart a course that will lead us out of the pandemic – eventually.
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Now, as the pandemic wanes in some regions but surges elsewhere, investors confront an unfamiliar dilemma: rising volatility and correlations between equity and bond markets, which may reveal portfolios to be insufficiently diversified to withstand an inflationary environment. Meanwhile, the movement toward investing through an ESG lens has reached a new level of maturity, as nearly all institutions in recent research indicate a commitment to ESG in some form.
Investors have long sought new markets and regions in search of assets that deliver stable returns that are uncorrelated with their current holdings. With this in mind, fixed income investments in the developing markets of Asia are a logical choice. Despite Asia’s varied economic landscape, most Asian markets bear investment grade sovereign credit ratings1, a reflection of the region’s sound economic fundamentals. Asian government and corporate bonds offer relatively attractive yields compared to similarly rated bonds in the developed markets, thus providing investors with an avenue to diversify their fixed income portfolios, while enhancing overall portfolio yield.
And as the region progresses toward more efficient modern economies, with increasingly transparent, well-governed fixed income markets, allocations to the growing Asian bond markets seem natural. Indeed, amid an uneven global pandemic recovery and rising inflation risk, investors increasingly recognise the potential of Asian fixed income to provide the portfolio diversification, income, and capital appreciation they seek.
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Asian fixed income is a large and growing universe – China alone is the world’s third-largest sovereign bond market. Given the potential that snarled global supply chains and rising labour costs may combine to drive simultaneous volatility in global equity and bond markets, investors have begun to consider novel shifts in portfolio allocation policy. These include portfolio tilts toward the Asian bond markets and even the establishment of dedicated Asia-specific fixed income mandates.
Thus, investors enter the end of 2021 by confronting a gradual, uneven recovery in which some economic regions, fixed income assets, and portfolio manoeuvres are likely to thrive, while others will founder.
Against this backdrop, Eastspring Investments and Institutional Investor’s Custom Research Lab conducted a global study among asset owning institutions and wholesale institutions to examine how investors view the Asian fixed income markets as a source of diversification, capital appreciation, and income. To do so, we surveyed nearly 200 investment decision makers around the world on their outlook for fixed income markets in Asia, the strategies and sectors they find most suitable, and the challenges they face when investing in the region. Through this survey and an interview programme with investment professionals at institutions in Asia, Europe, and North America, we have sought to document a new and emerging role for fixed income allocations and the opportunities to use allocations to Asian assets in it.
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1 Asian bond markets that have investment grade ratings (foreign currency sovereign ratings) include China, South Korea, Taiwan, Philippines, Malaysia, Singapore, Indonesia, India and Hong Kong. Source: S&P ratings. As of 18 October 2021.