Western Asset Management, the leading global fixed income manager wholly-owned by Legg Mason, Inc., said the worst period of risk aversion is over, and that Asian corporate bonds now offer some of the highest current liquidity premiums with the best macroeconomic fundamentals.
“All sectors of Asian local bonds look attractive at current levels. Government bonds have rallied but monetary policy will likely remain loose and inflation should be dampened by lower commodity prices and weaker growth. Sovereign and corporate bonds will likely benefit as positions are reallocated between investors. Default rates in Asia remain low whereas the current prices of Asian corporate bonds imply an unprecedented surge in failures over the next few years. This large valuation gap appears to favor investors,” said Rajeev De Mello, Head of Asian Investment at Western Asset.
The global fixed income manager points out that Asia is in a much healthier financial position now than it was during the 1997-98 crisis. Countries have substantial foreign reserves and boast strong fiscal positions, companies have more robust balance sheets and banks are far sounder. Monetary policy-makers also have room to reduce interest rates. This gives the region a better position from which to address the global slowdown. Asia will also be a beneficiary of lower food and commodity prices.
“Our short-term outlook for currencies is more mixed as certain countries will likely allow their currencies to fall in order to soften the adverse impact on their export markets. However, massive monetary expansion in G3 countries should have an impact on their currencies relative to Asian currencies.
Western Asset believes that the expected decline in risk aversion in the next few months will also benefit those Asian currencies specifically hit in the recent months. Over the medium term, Asia is likely to rotate its growth away from the export sector towards domestic sectors. As that happens, the attractiveness of weaker currencies to stimulate growth will diminish.
“Therefore we remain positive on Asian currencies in the medium term. We have increased our exposure to corporate bonds and will continue to scale in issues and sectors where we see extraordinary value. With the recent sell-off, Asian corporate bonds currently offer significant opportunities in a range of subsectors and countries,” De Mello concluded.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Investment Asia. The author was not remunerated for this article.
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