Asian currency products look set to perform well while global bond markets are likely to correct over the coming months as investors start putting their money into other higher-yielding areas, says Tim Haywood, investment director and business unit head at GAM, the international hedge fund manager.
Speaking exclusively to asiamoney.com, Haywood, who runs the company’s fixed income unit, said that Asia’s currency risk premiums have generally underperformed this year versus Europe and the US, especially when compared to the regions’ respective equity risk premiums.
“It’s been a year of forestalled performance [for Asian currencies] but we think that means that it’s like a coiled spring; the more it does not perform now the more it will do so in the future,” he said.
The reasons for this are that the region’s fundamentals, in the form of economic growth, balance of payments, savings rates, banks and reliable financial systems, are by and large all good.
Haywood notes that these fundamentals, combined with good second-quarter economic figures, will offer an element of de-coupling and mean regional currencies outperform “ugly sisters” such as the US dollar, euro, sterling or Japanese yen.
“The dollar looks like it might be set for a depreciating period and given that Asian currencies did not rise that much in recent months, they should perform especially well as the US dollar depreciates,” he said.
That is likely to mean a rush of capital from the US into overseas markets, with Asia a likely recipient. And given that bonds are tightly held in Asia, Haywood believes that currencies and equities might well be the biggest beneficiaries.
Despite Haywood’s negative outlook for bond markets GAM’s interest in, and number of staff focused on, Asia’s debt space is on the rise.
GAM has already recognised increasing interest in Asia. Haywood notes that the firm’s global emerging market products, of which Asia constitutes a sizeable proportion, have roughly doubled in asset size to US$5 billion over the past 18 months.
“And it’s not just foreigners looking to buy local debt,” he adds. “It’s also been encouraging to see the development of local pension funds, insurance funds and mandatory schemes that will support this asset class when flighty foreign capital leaves.”
Haywood also noted that the opening of the renminbi could offer GAM opportunities. The hedge fund manager is studying the feasibility of creating renminbi-denominated share classes of emerging market products.
Such products would typically take a set of underlying instruments such as a basket of bonds, and then swap the currency exposure into renminbi, with the objective being to benefit from the yields of the instruments and also the appreciating currency.
However Haywood notes that it is early days in terms of the renminbi’s internationalisation and too soon to tell how such products might look.
While Haywood is generally optimistic about the world’s outlook—he rates the chances of a double dip at only 5%— he says that GAM is hedging its fixed income positions by looking to short bank credits, and stay long on sovereigns.
“Many domestic banks have already been heavily bailed out as well as increasingly regulated and controlled. Were another crisis to occur, the pain would probably extend a lot further up their capital structure. Sovereigns on the other hand are more likely to stay current on their public debt,” Haywood reasoned.