Asset manager says asset class, with its solid fundamentals, poised to be in better shape for potential upsides

Asian fixed-income assets, which stayed resilient throughout 2020, can continue to perform this year due to a supportive global backdrop and continued policy support, said Manulife Investment Management.

With better fundamentals than its peers, the asset class is poised to be in better shape for potential upsides, anchored to the continent’s resilient credit profile and burgeoning multi-year sustainable investing opportunities, said the wealth and asset manager in a research note today.

“Despite the notable challenges of the past year, the fundamentals of Asian fixed income remain intact, with the asset class remaining resilient throughout the year, delivering positive performance.”

Going into 2021, Manulife said it is positive about a broader Asian fixed-income landscape, given its resilient credit fundamentals, continued accommodative monetary and fiscal policy, and downward pressure on the United States dollar.

“(With) aggressive rate cuts and an unprecedented balance-sheet expansion by global central banks, more and more developed market government bonds become negative-yielding.

“In the event of a ‘tail-risk’ event, that is US Treasury yields turning negative (for example, a delay in the distribution of Covid-19 vaccines or a deflationary environment), we could see a major asset rotation among bond and income investors, driven by the ongoing search for ‘positive’ yields, making Asian bonds stand out, given their sound fundamentals.”

It said defaults are expected to remain reasonably contained and idiosyncratic in the first half of the year, before an improvement in the second half as vaccines are rolled out globally, and Asia’s US dollar bond market is ready to refinance issues, which is conducive to improve risk sentiment.

“Having said that, credit selection will remain key in Asian markets, as the recovery is expected to be uneven across countries and sectors,” said Manulife, adding that it sees emerging opportunities in Asian sustainable bonds.

Although Asia has emphasised on environmental, social and corporate governance (ESG) later than other regions such as Europe, it said, recent trends showed momentum and optimism for investors in the space.

“With China, Japan, South Korea, Hong Kong and New Zealand committing to become carbon neutral, and other governments likely to follow, we expect to witness a greater number of green bonds issued.”

It said global green bond issuance grew 12% last year compared with the first nine months of 2019, and the global trend is supportive of further growth in the green and sustainable-labelled bond segment.

“All in all, we believe Asian fixed-income portfolios should not only consider ESG risks, but actively take advantage of the ample ESG opportunities.

“While 2020 was an important year for ESG in Asia, we expect even more in 2021, as investors and companies explore innovation in this space.”