Asian government bond ETFs likely to see increased demand as investors seek higher returns

Jul 10th, 2012 | By | Category: Fixed Income

The search for returns in an environment of financial repression is likely to drive future demand for Asian bonds, says Allianz Global Investors.

Asian government bond ETFs likely to see increased demand as investors seek higher returns

Asian economies appear to be more resistant to external influences or crises.

According to a report by Allianz Global Investors, Asia has regained its former economic power with an enormous process of catching up, which should be sustainable. With 60% of the world’s population, Asia’s emerging economies already generate around 29% of global economic output (adjusted for purchasing power). Oxford Economics estimate that this will rise to roughly 50% by 2036.

[See Southeast Asia ETFs set to roar, led by Indonesia, Malaysia, Philippines, Thailand and Vietnam]

Due to the rising significance of intra-Asian trade combined with the low debt levels of individuals and government budgets, Asian economies appear to be more resistant to external influences or crises.

Stefan Scheurer, capital market analyst at Allianz Global Investors, believes that demand for Asian government bonds will increase: “Asian government bonds currently generate a return of 4.2% per annum on average in local currency terms.  As such they are more attractive than developed market bonds with their average yield of 2.3%. With a 10-year US bond, investors face a real loss of purchasing power when factoring in the impact of inflation. With government bonds issued by industrialised nations near all-time lows, investors can mitigate their risk exposure and raise their yield expectations by considering Asian bonds.”

FEATURED PRODUCT

SPDR Citi Asia Local Government Bond ETF (ABND)

– Tracks the Citi Asian Government Bond Investable Index,
reflecting the performance of the local currency
government debt markets of various Asian countries

– Provides exposure to investment-grade bonds issued
by the governments of China, Hong Kong, Indonesia,
Korea, Malaysia, Philippines, Singapore and Thailand

– UCITS compliant, London listed, seeking UK Reporting
Status, eligible for ISAs and SIPPs, cross-listed on
Deutsche Börse (SYBX), TER 0.50%

SSgA launches SPDR Citi Asia Local
Government Bond ETF (May 14, 2012)

Top-rated government bonds are becoming ever rarer among developed industrialised countries. Growing Asian countries have been able to avoid this negative trend and have actually even improved their debt situation overall. China’s rating, for example, has been improving since 2002, and Hong Kong even managed to secure the coveted triple-A in 2010.

The rating agencies’ main justification for the steady upgrades over recent years has been the marked improvement in the debt situation, alongside strong economic growth. Indonesia, for example, has managed to reduce its national debt from more than 70% of GDP before the Asian crisis to currently below 30%.

By contrast, the International Monetary Fund expects the average national debt of the G7 nations in 2012 to reach as much as 93%, with some individual countries well in excess of that mark. The debt forecast for selected Asian countries for 2012 is about 50% on average. And let’s not forget the foreign exchange reserves that the Asians have been hoarding over recent years. Asia now holds more than 60% of the world’s currency reserves. [See Asia-Pacific ETFs: Region offers resilience, value and opportunity]

Alongside government bonds, Asian corporate bonds are also currently offering better yields than their peers in industrialised countries. Asian bonds generally could benefit from the structural strength of the Asian economies – in terms of high growth rates, strong ability to compete, trade and current account surpluses – as well as a potential currency appreciation.  As Asian bonds have shown moderate risk-return profiles compared with bonds of industrialised countries in the past, they could also bring diversification benefits within a balanced portfolio.

For investors looking to gain exposure to Asian bonds via ETFs there are a couple of London-listed to consider:

SPDR Citi Asia Local Government Bond ETF (ABND)
SPDR Citi Asia Local Government Bond ETF (ABND) ETF aims to track the performance of the Citi Asian Government Bond Investable Index. The Citi Asian Government Bond Investable Index currently measures the performance of Asian government bonds, excluding Japan, issued by the governments of China (offshore issues), Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand. Only bonds with a maturity of greater than one year are included. The index uses market capitalisation weighting, with an individual country cap of 20%. Bonds must be rated at least C by S&P or Moody’s. London listed. Physically replicated. c. 114 holdings. TER 0.50%.

iShares Barclays Capital EM Asia Local Govt Capped Bond ETF (SGEA)
iShares Barclays Capital EM Asia Local Govt Capped Bond ETF (SGEA) aims to track the performance of the Barclays Capital Emerging Markets Asia Local Currency Govt Country Capped Index. The ETF invests in physical index securities. The Barclays Capital Emerging Markets Asia Local Currency Govt Country Capped Index provides a broad measure of the performance of local currency government debt issued by emerging market countries in Asia. Currently, five countries are included in the index: Indonesia, Malaysia, Philippines, South Korea and Thailand. The list of eligible countries is reviewed on a periodic basis depending on liquidity, capital control and overall accessibility. Country weights are capped at 40% of the index to ensure diversification within the index. London listed. Physically replicated. 33 holdings. TER 0.50%.

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