Indonesia, Malaysia local debt top picks

Written by Umesh Desai
Tuesday, 03 November 2009 11:08

HONG KONG: Appreciating currencies and moderating inflation expectations will boost Asian government domestic bonds, a fund manager with fixed income specialist Stone Harbor said yesterday.

Jim Craige, senior portfolio manager with the investment boutique which oversees US$19 billion (RM65.36 billion) in assets, said local bonds from governments like Indonesia and Malaysia would give returns in excess of 15% over the next 12 months as investor perceptions about the region change.

“We are at an inflection point where local currency bonds will heavily outperform dollar bonds,” he told Reuters in an interview while adding that dollar bonds would find it difficult to duplicate this year’s performance.

The proportion of Asian local currency bonds in the aggregate portfolio of funds he oversees would double from the current 8% over the next quarter to reflect the outperformance expectations, he said.

Indonesia’s 10-year dollar bonds sold in March this year at a yield of 11.75% have rallied sharply on the back of the surge in risk appetite and are currently yielding around 6%. In contrast the 10-year rupiah-denominated government bonds are still yielding more than 10%, while the currency has appreciated about 15% in the year to date.

But Craige said perceptions about developing markets are changing because of better growth prospects, improved debt/GDP ratios, moderate inflation expectations and growing foreign exchange reserves.

He said the weighting of emerging market debt in pension fund portfolios, currently less than 1%, would have to increase also to reflect the higher contribution of their economies to the global aggregate.

The liquidity premium that was attached to longer dated debt from emerging market governments would also fade, he said.

“We believe a lot of yield curves are steep, because of lack of liquidity and some inherent inflation risk that is not warranted,” he said, forecasting curve flattening in emerging markets.

But Craige said his fund would be very selective about investing in Asian corporate debt due to supply concerns.

“The corporate market needs to issue in 2010; there are a lot of rollovers that need to be plugged. That is one of the reasons why we are underweight on corporates because supply overhang will be significant,” he said. — Reuters


This article appeared in The Edge Financial Daily, November 3, 2009.