Australian investors are being urged to increase their exposure to Chinese and Indian credit, owing to imminent political change, low default rates and high yields.
Corporate emerging market debt represents only 5 per cent of the BofA Merrill Lynch Global Corporate Index, but AXA Investment Managers has double this exposure in several of its strategies.
Craig Hurt, AXA IM’s director of Australia and New Zealand said its tilt on emerging markets seeks to address the over-representation of the developed world in the index and its implicit underestimation of growth potential over the long term in countries such as India and China.
AXA’s allocation has delivered a positive outperformance versus the universe since the launch of its global investment grade smart beta credit strategy more than a year ago, of which Mercer’s investment business in Australia has recently invested $150 million.
HSBC Asset Management is another firm urging Australian investors to take advantage of opportunities in Chinese and Indian credit.
Geoff Pidgeon, head of HSBC Asset Management Australia, said the low representation of Chinese bonds in global portfolios was a short position on a sector with low default rate and yields of 7-7.5 per cent.
The liberalisation of financial markets in China is another key theme in HSBC’s view. Pidgeon said global insurers could now underwrite policies in Renminbi which was leading to greater foreign issuance of credit in China.
In India bond yields range between 8-9 per cent and Pidgeon sees now as a good time to buy due to the recent sell off in the Indian rupee, as well as the likelihood of the business-friendly Narendra Modi of the Bharatiya Janata Party becoming prime minister in elections being held this month.