Local currency investments in Asia are set to surge as investors look to diversify away from the dollar, Brian Baker, chief executive for Asia Pacific at bond investor Pimco told Emerging Markets.
“The US dollar is in a secular decline,” Baker said. “Asia’s official investors – the central banks, sovereign wealth funds and others – are looking at this as a way to diversify their dollar holdings.”
Pimco, one of the world’s biggest bond investment companies, is planning a new fund dedicated to Asian local currency bond markets as debt issuance in the region booms.
The move reflects a broader pull away from mature markets affected by the credit crunch and demand for non-US dollar assets.
“It’s a natural offshoot from our global fund. Other currencies are attracting foreign direct investment and the local markets are developing,” Baker said.
Baker said that the firm has yet to begin formally marketing the Asian fund and is working on “assessing demand and working out which markets we can get exposure to.”
“Where that is challenging for regulatory reasons, we are looking at the possibility of getting exposure in another form, through a suitable proxy,” he said.
Pimco already manages a $3.5 billion local currency bond fund, which invests in domestic currency debt in emerging markets worldwide, but is responding to increasing demand from regional investors for Asian opportunities.
The volume of outstanding local currency bonds in East Asia jumped by 21% in the second half of 2007 compared to the same period in 2006, according to the Asian Development Bank’s Asia Bond Monitor report.
Rajat Nag, ADB managing director general, has identified developing Asian local currency capital markets as a priority “of equal importance to having the right legal frameworks”.
Nag told Emerging Markets: “One reason we have not been able to get investment in infrastructure to the extent that we should is the lack of a suitable financial architecture in Asia. We have huge savings, but we don’t have the mechanism to mobilise those savings, except through the banks.”
Key deals in local debt markets so far this year include a RMB1.993 billion deal from GMAC-SAIC, the first securitization backed by auto loans in China. The Export-Import Bank of Korea has issued a 1 billion ringgit bond in Malaysia, the first Korean borrower to enter that market.
“Domestic markets are becoming more important,” Cristina Chang in the fixed income capital markets group at Citi said. “Issuers are considering whether deals can be placed in the local markets, and whether that works for them in terms of pricing and demand, given that the offshore markets now are fairly limited and the spread required is quite wide.”
Whether local currency markets will retain their newfound importance if and when more established international markets regain their former liquidity is an open question. If they do, it will be a significant shift.