Asian debt set to gain from Brexit fears

The flight to safety by investors following the UK’s decision to quit the European Union could include Asian debt, according to an asset manager.

The Brexit vote pushed investors out of commodities and global equities and into safe haven assets such as gold, the US dollar and the yen, along with US Treasury bonds. But NN Investment Partners portfolio specialist, Asian debt, Joyce Tan, said that Asian debt, denominated in US dollars, was an unexpected beneficiary of the move into safe harbours. “There are many reasons for Asia’s resilience. One fundamental reason is that Asia’s trade links to the UK are generally small, accounting for less than 1% of GDP in most countries. Even as Standard and Poor’s stripped the UK of its AAA rating, it concluded that Brexit was largely ‘credit neutral’ for Asian bonds,” Tan commented.

She added that increasing local ownership in Asian bond markets has reduced vulnerability to international investor sentiment. In addition, Tan said that a fall in new bond supply this year has also helped strengthen Asian hard currency bonds, due to Chinese issuers converting their dollar debt into onshore yuan funding. Tan concluded: “Over the medium term, Asia could continue to benefit from the search for yield. Already, there is increasing expectation that central banks in the developed world will trim policy rates to contain the fallout from Brexit. The US Federal Reserve’s tightening cycle, which has barely begun, looks derailed. With a yield-to-maturity of about 4.2%, Asia’s risk-adjusted returns look attractive, given the alternatives.”