thirsty work Liquidity is a major determinant of fixed income returns, says Andrew Lill, head of listed asset investment specialists at AMP Capital Investors. “Why is it that in 2011, US Treasuries continue to be strong? It’s because they still offer the best liquidity to investors,” Lill says. However, liquidity in Asia ex-Japan debt markets has improved dramatically since the region’s currency crisis in 1997- 98. Nick Maroutsos, managing director of fixed income boutique Kapstream Capital, says the region now accounts for about 12 per cent of global debt issuance. He says this is not reflected in global fixed income benchmarks, such as the Barclays Global Aggregate Index, which at September 30 attributed 3.85 per cent of worldwide issuance to Asia ex-Japan.
Lill says comparing these market capitalisation-weighted indexes with those weighted towards the GDP of issuers provides a more accurate picture of the supply of emerging Asian debt. Corporations, predominantly quasi-sovereigns and private banks, have greatly increased issuance in the past decade. Maroutsos says the volume of non-bank corporate loans is also increasing and will “quadruple” in coming years. This is making it easier to trade bonds in Asia ex-Japan markets. “If you bought these companies five years ago you would have to hold them to maturity,” he says. However, Kapstream still prefers debt with shorter maturities of up to five years because these instruments – including sovereign, quasi-sovereign and corporate debt – are more liquid and better researched by brokerages than longerdated bonds are, he says.
what Asian crisis? Asia ex-Japan markets have also accrued deep foreign exchange reserves since the region suffered a currency crisis in 1997-98. This helps investors in local-currency debt more easily convert coupon and principal payments into their own home currencies, Watson says. “You can get bad price action along the way but there is no sense that you can’t take your money out,” he says. The gradual strengthening of Asian currencies is also seen by investors as an attractive source of returns, Lill says. “No-one really knows when Asian currencies will come off their pegs to the US dollar but everyone has a very strong opinion that they will,” he says. Some investors prefer exposure to long-term currency appreciation in Asia ex-Japan through debt instruments rather than equities, which are viewed as being more volatile. Fixed income instruments are often used as defensive exposures. However, investors see Asia ex-Japan debt markets as growth assets, alongside equities. “We think the currency and yield opportunities in Asia can match the return opportunities of equities but with less downside risk,” Lill says. Fixed income managers welcome this point of view because it means that more growth-seeking investment mandates are “contestable”.