Andre de Silva
Head of Asia Pacific rates
HSBC
Expansionary monetary policies in the US, Europe and Japan are expected to dictate policies in the emerging markets, especially Asia. Both short- and long-term US rates are set to remain suppressed, which reinforces the search for duration and yield in local Asia rates markets.
The highest convictions on a total return basis are the Philippines, Malaysia, Indonesia and Singapore followed by India for the first half of 2013. The Philippines is firmly on track on the path to investment grade status and a more resilient economy, including remittances and political stability, favours an overweight stance despite already outperforming in 2012.
In Malaysia, valuations, sizeable real yields, continuity of fiscal policy reforms post the general election (due by April 2013) as well as more tolerance for foreign exchange (FX) appreciation and foreign participation in the domestic bond market, point to a strategic overweight allocation. Against immediate peers Korea and Thailand, Malaysia government bonds are considered the cheapest and a key target for rotation.
Carry and capital gains from Indonesia government bonds are likely to more than compensate for any currency slippage and elevate the market to amongst the top four performers. This would represent a stark contrast to 2012 when FX losses were significant, resulting in Indonesia delivering the fifth-lowest return in Asia in dollar terms.
We also favour Singapore, in spite of historical low yields that are below that of US Treasuries, but this is largely as a result of prospective currency gains, with the Monetary Authority of Singapore (MAS) endorsing 'modest gradual' appreciation.
Whilst greater access to India's government securities market has been granted, with a US$10 billion increase in foreign institutional investor (FII) quotas, the overall restrictions limit this market as the top choice. Nonetheless, the market is still favoured on the prospect of more fiscal reforms.
Thomas Harr
Head of local markets strategy
Standard Chartered
In 2013, we expect Asian local currency bonds to have another strong year, but gains will come more from FX gains than duration.
We see two important themes for the year: firstly, central bank reserves diversification and secondly, Asian FX appreciation.
We believe local currency bond markets in Korea, Singapore, China and Malaysia are particularly well positioned to benefit from reserve diversification by central banks and sovereign wealth funds given their relatively high credit quality, liquid bond markets and strong FX outlooks. More recently, central banks and sovereign wealth funds have also become increasingly interested in higher-yielding markets such as Indonesia and the Philippines.
We expect another strong year for Asia ex-Japan currencies in 2013 as they benefit from a modest cyclical rebound in China. Real money funds have generally been neutral on Asian bonds in 2012, partly because investors saw Asian currencies as unappealing. If investing in Asian fixed income offers total returns of 5% to7% (as FX partly makes up for low yields in the region), then real money funds will be more inclined to shift to overweight positions in Asia.
For 2013, our top pick from a total return perspective is India, where returns should be split between bonds and FX. We expect 10-year bond yields to drop to 7.25% from 8.17% currently on Reserve Bank of India (RBI) rate cuts, while we forecast that the Indian rupee will fall to INR53 against the US dollar at the end of 2013 from INR55 at end-2012 on stabilising growth and lower wholesale price index (WPI) inflation.
Frances Cheung
Senior strategist Asia ex-Japan, fixed income market research
Crédit Agricole
After a year of stellar performance for most Asian sovereign bonds, we still expect these bonds to benefit from foreign flows. However, bond investors should focus on the yield pick-up vis-à-vis bonds in development markets, and should not expect further, meaningful capital gains from current levels.
Indeed, as Asian economies recover and risk appetite returns, we look for Asian rates and yields to go up. The spread between equity earnings return and bond yields represents the extra return that investors demand, to shift investment from bonds to equities. In Asia ex-Japan, the spread over five-year sovereign bonds had widened from the trough in 2009 to more than 400 basis points (bp) earlier this year before narrowing back to 300bp plus.
The outperformance of bonds over equity is not overly alarming, however, when the spread was as wide as 600bp during the mist of the credit crisis. Asian sovereign bonds still offer attractive yield pick-up over developed market bonds. This is against the sound economic fundamentals and most likely better growth in Asia than in the developed markets, which will continue to attract inflows, especially from those including foreign central banks, which look to diversify their portfolios.
China government bonds and Korea treasury bonds remain our top picks. On an un-hedged basis, bond investors are exposed to the potential appreciation of Asian currencies as well. Under a rising interest rate environment we would expect bond yields to rise at a slower pace that rates do. As such, going long bonds and paying fixed rates could be a viable strategy. The risk is higher US Treasury yields, which would render the yield pick-up narrower, or diminishing for asset swap trades.
Ashish Agrawal
Head of non-Japan Asia emerging market rates strategy
Credit Suisse
In our view, Indian government bonds can potentially yield double-digit total returns in 2013. The combination of high yields and duration gains coupled with stability in the exchange rate should allow bonds to outperform other Asian markets.
Supportive macro and market policies should be the main drivers of the bullish move. We expect the RBI to lower the repo rate by 125bp to 6.75% in 2013, starting as early as January. Historically, bond yields have reacted more to the actual easing moves and we think only part of the expected easing is being priced into bonds.
The added focus on fiscal discipline could be another source of support. The progress on subsidy rationalisation and prospects of better growth could help the finance minister target a lower fiscal deficit in the 2014 fiscal year. This, in turn, should support bullish sentiment given the implications for supply.
The RBI’s open market purchases of bonds should also add to the demand for bonds. We expect the RBI to buy up to INR500 billion (US$9.21 billion) from now to March end. Policymakers are looking at ways to ensure better utilisation of existing foreign investor limits and are likely to increase limits by another US$5 billion.
We expect limits to be fully utilised, especially if constraints to participation are addressed. Foreign investors hold only 4% of outstanding bonds, which is low when compared with some markets in the region. A bullish backdrop for bonds and the supportive policy wave should encourage more investments in Indian bonds.
Rate cuts, a lighter supply calendar and better demand from foreign investors and RBI should spur a bond rally and bull steepening the bond curve. We expect the 10-year benchmark yield to fall to 7.75% by March 2013 before stabilising, with risks mainly stemming from fiscal slippage.