Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
With robust growth and more moderate inflation compared to other regions, Asian countries are driving global economic expansion, making the region an enticing investment destination. Amidst this backdrop, Asian local currency bonds are also becoming more popular as they offer promising real returns.
Between 2018 and 2022, for example, Asian local currency government bonds from India and Indonesia delivered remarkable gains, surpassing 43% and 40%, respectively, in local currency returns, as per data from Markit iBoxx and JP Morgan.
Meanwhile, Malaysia, the Philippines, China, and Thailand exhibited returns ranging from 9% to 21% in the same timeframe. In contrast, government bonds in the US, Europe, and Latin America experienced losses in local currency terms over the five years.
This makes Asia’s local currency bonds attractive
The surging popularity of Asian local currency bonds can be attributed to the thriving economies in the region, marked by dynamic growth. Unlike the developed Western economies, which face challenges such as persistent inflation and recessionary risks, Asian economies are poised to benefit from a significantly stronger and more resilient economic environment.
According to the IMF’s projections, advanced economies are expected to grow modestly, with a growth rate of 1.3% in 2023 and 1.4% in 2024. However, in stark contrast, Asia is anticipated to experience robust expansion, with growth rates of 4.6% and 4.4% in 2023 and 2024, respectively.
“The share and importance of Asian economies and capital markets are widely expected to continue to rise in the coming years. Asian local currency bonds look like an area of the fixed income market that still has the potential to deliver attractive income returns…,” said Schroders.
Additionally, other global market factors can also favour the asset class. Edward Ng, Senior Portfolio Manager at Nikko Asset Management, holds the view that a potential pause in the Fed’s tightening cycle, in light of a slowdown in the US economy, could contribute to stabilising the global rates market in the upcoming months.
“This could potentially prompt foreign funds to return to Asia as the greenback weakens…We believe that such developments will support Asian currencies and regional bonds,“ he adds.
Furthermore, Ng highlights that the post-pandemic narrowing of Asia’s budget deficits is expected to result in reduced issuance of local currency bonds. According to him, this reduction in net issuance or supply will be supportive of favourable bond prices.
Meanwhile, the attractiveness of Asian local bonds could be further boosted by the possible inclusion of specific Asian government bonds in widely recognized global fixed income indices.
South Korea is actively working towards getting its government bonds included in the FTSE World Government Bond Index (WGBI), while India is pursuing inclusion in the JPMorgan Government Bond Index-Emerging Markets Global Diversified Index and the Bloomberg Barclays Global Aggregate Index.
