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Investors bullish on Asian fixed income, survey shows

Despite market volatility, global investors are bullish on Asian fixed income, especially China bonds, a new survey by Eastspring Investments found. As per the study, Asian bonds are being increasingly sought out for better diversification and yield, amid growing macro concerns such as the global growth and inflation outlook.

For the survey, Eastspring polled close to 200 institutional and wholesale investment decision-makers across Asia, Europe, and North America between July and September 2021.

According to the survey data, investors have high expectations for the return potential from prospective fixed income investments in Asia. More than 70% of respondents worldwide agree that Asia’s fixed income assets often provide higher returns at similar risk compared with those in developed markets.

Consequently, 27% plan to increase their Asian fixed income assets holdings within the next 6 months and 41% within the next 12 months. Investors from North America showed the highest determination with 55% saying they expect to increase Asian fixed-income holdings in the next year, followed by 40% from Asia and 26% from Europe.

Only 14% of surveyed investors do not plan to increase Asian fixed income holdings.

Investors seek further diversification

Overall 70% of respondents said they seek further diversification in their bond holdings with Europe being the region with the highest determination to do so (75%) – compared to Asia (68%) and North America (67%). At the same time, 66% of overall respondents are keen to expand holdings of new bond classes in new markets – with no major differences between the markets.

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However, 67% of respondents worldwide (63% of respondents from North America, 66% from Asia, 71% from Europe) said they plan to reduce overall bond exposure.

According to Eastspring Investments study, investment decision-makers are especially concerned with inflation, uncertain GDP growth, prospects rising interest rates, trade and fiscal policy changes to weigh on their fixed income portfolios. Nearly three out of four respondents selected inflation as the biggest concern, while 63% said post-pandemic GDP growth will most likely affect fixed income portfolios. Whereas, 56% of the global respondents chose the prospect of rising interest rates as concerns affecting their portfolios.

Bullish on fixed income – especially China fixed income

For Asian fixed income, a little more than one third of the surveyed investors revealed that they are “bullish/optimistic” (36% institutional, 32% wholesale), while over 40% stay neutral (42% institutional, 44% wholesale).

The investors who want to increase their exposure to Asian fixed income show the greatest enthusiasm for high-quality bonds such as Asian sovereign debt and investment grade bonds, according to the study. Overall 77% of respondents from North America, 64% from Asia and 59% from Europe seek to invest in high-quality sovereign debt. Meanwhile, 51% of respondents from North America, 49% from Asia, 37% from Europe preferred Asian investment-grade bonds.

As reasons for this, interviewed investors cited the combination of Asian governments’ ability to manage inflation as well as attractive yields from fixed-income investments from the region.

Because of this appeal a solid majority of global respondents (63%) see China bond funds as “especially suitable” for their portfolios over the next two years. While 40% currently have a direct allocation to fixed income in China, 37% of all respondents said they look to consider the same in the next 24 months.

Also, when queried on China’s fixed income markets, the bulls outnumber the bears by more than three to one. In numbers: 56% of institutional investors and 61% of wholesale investors are optimistic on China fixed income.

Among the 63% of overall respondents who viewed China bond funds as suitable, 66% cited ‘income potential’ as the principal reason for increasing direct allocations to China bonds. Although, only 9% of overall respondents see ‘diversification’ as the primary benefit of such China bond funds allocations.

What is holding investors back?

Commenting on the results of the study, Ooi Boon Peng, Head of Investment Strategies, Eastspring Investments, said: “With Asia expected to remain the world’s growth engine, demand for Asian bonds will continue to be fuelled by Asia’s structural needs to finance and support infrastructure gaps, demographic shifts, and sustainable growth. The Asian credit market has long offered investors better risk adjusted returns compared to developed market bonds. Going forward, the growing size, maturity and diversity of the Asian fixed income market offers compelling investment opportunities for investors, especially as the region recovers post the Covid-19 pandemic”.

However, despite the enthusiasm for Asian fixed income, investors are seeing challenges that limit their ability and interest in investing in the segement.

“Our survey data suggests investors believe more can be done by Asia’s issuers, regulators, and market participants to provide a well-informed, transparent, and highly liquid venue for fixed income investment,” Peng added.

Corporate governance, data quality, and reporting standards is perceived as the biggest challenge to investing in the region for 42% of all respondents. 39% cite concerns about the liquidity of Asian fixed income markets. In the meanwhile, a perceived lack of suitable offerings from the region’s asset management firms concerns 38% of all respondents.

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