Amundi’s Case for Opportunities in Asian Fixed Income - Is It Time To Buy?

Having been plagued with geopolitical wars, inflation, and recession against a punishable background in 2022, the global economy is moving onto the next phase of the unknowns. Despite volatility risks, we believe there is light for a positive momentum with dynamic strategies for investors when markets recover.

We spoke to Joevin Teo, the Asian fixed income portfolio manager at Amundi Singapore who is managing portfolios across various asset classes. He will be joining us at the Fixed Income and FX Leaders Summit APAC and is looking forward to the in-person meetings with a variety of local and regional experts as investors navigate a volatile market environment together.

Meanwhile, Joevin shares with us his thoughts on how investors can identify opportunities in Asian fixed income and currency markets, particularly with an ESG slant as well as the overall sentiment among investors over China bonds.

What is the outlook for Asian credit market for the remaining of this year?

There remain selective opportunities in Asian fixed income and credit. While the overall macro backdrop and operating environment is likely to remain soft, investors could benefit from higher absolute yields particularly in shorter-dated tenors, particularly in higher-quality defensive credits. Investors could also benefit from positive supply dynamics given that dollar issuance has been muted.

Since Asia fixed income market is looking attractive again, what are 3 key reasons investors should consider Asian bonds?

• Hard currency corporate bonds should benefit from resilience in corporate earnings and a supportive supply outlook.
• Valuations are attractive; investors in both Asian investment grade (IG) and Asian high yield (HY) could still benefit from higher yields while taking on lower duration compared to DM and other EM markets.
• Local currency government bonds in EM Asia are attractive in part due to subdued inflation and relatively resilient FX backed by strong central bank reserves.

Can Asian companies weather the current economic turmoil?

Yes, they can. Corporate fundamentals are resilient and supply dynamics are positive. Sector selection is important. Investors are likely to focus their attention on more defensive sectors such as financials and utilities, particularly larger corporates with stable bottom-up fundamentals and government support. Sectors such as technology could also benefit from any stabilization in policy restrictions.

Specifically on China, is it a good timing to invest in its bond market?

In general, bonds are back, but an active approach is paramount given the still-high uncertainty. After the great repricing in the first half of the year and as we move to an environment with a higher risk of recession, government bonds are worth looking at as yields are now more appealing. Here we recommend a tactical approach to duration management, considering markets are being driven by both inflation and growth expectations, pushing yields in different directions depending on the prevailing narrative. In credit, we remain cautious, particularly on the high yield segment. We favour the investment grade space and the US over the Eurozone, as US fundamentals are at less risk of deterioration thanks to the more resilient economy. We emphasize that an active management approach in bonds is key at this stage amid the risks of a further pick-up in inflation due to energy prices and supply chain disruptions, possibly leading to a more hawkish Fed stance than is currently priced in by the market. On EM bonds, we are cautious on EM duration but acknowledge that monetary policy normalisation in EM is advanced vs. DM, hence there are opportunities in Hard Currency (prefer HY to IG). In Local Currency, we are highly selective due to inflation uncertainty and the different tightening pace across countries. In China, we are monitoring the growth deceleration, geopolitical risks and government policies.

As China’s property crisis deepens, what signals should investors watch to identify turning points in the sector?

Investors will need to see continued support to the real estate market, such as policy easing and possibly state guarantees to save higher-quality developers. Any signs of an end of China’s zero-covid policy would also enhance sentiment towards the sector and Chinese assets in general. Any signs of continued easing and reversal of previous regulatory tightening would also be welcomed by markets.

Can you share Amundi’s approach to ESG and what it means for investors?

We have one of the largest ESG departments globally more than 50 dedicated people, and this department report directly reports to the Group CEO. Our role is not only to finance the world as it is today, but also, to help finance the world as it should be. As an asset manager, Amundi has an active role to play in supporting and driving the energy transition, while addressing important issues of social cohesion. As a philosophy, we take action in three ways:

• First, in terms of directing the capital entrusted to us by our clients, and towards businesses and projects that promote a fair transition.
• Then we have an ongoing dialog with companies, and especially with those of which we are the main shareholder, on their ESG strategy and prospects;
• Finally, we always ensure that we, as a company, act in a responsible way, and to apply to ourselves what we demand of others.

There are varying objectives & methods to ESG investing for the investor. For example the investor could be motivated to invest responsibly to respect specific values, integrate long-term risks, for sustainable performance or generate impact. ESG investing can also be approached in different ways, for example by exclusion, rating-based integration or thematic investing. Ultimately the investor has to take into consideration their own objectives and risk appetite when investing in ESG investments.

What opportunities and challenges does the Asian landscape present in terms of Sustainability developments and investment?

In terms of opportunities, we are seeing a rapid growth in ESG investing in Asia. Taking ESG funds' AUM in Asia Pacific for example, it is now totalled US$83bn and represented c.4% of broader market AUM as of Q2 in 2022. Even though ESG funds' AUM in Asia-Pacific was down 4% on a quarter to quarter basis, in line with the global trend of ESG funds, it is still up 24% on a year-to-year basis. One major catalyst for ESG becoming more closely integrated into mainstream investment practices in Asia has been the rapidly evolving policy landscape. APAC ESG policies have doubled in the past 5 years, now representing 20% of global ESG policy, vs 44% in Western Europe and a much lower 4% in North America.  As we see many policymakers and regulators continuing to strengthening the ecosystem across Asia, we believe this will sustain ESG investing in the region in the long run. Though responsible investing is growing, yet we are seeing responsible investing is in the nascent stage for some investors, especially the smaller local investors in Asia. A survey conducted by CFA on ESG integration in China1, indicates beliefs that portfolio returns will be negatively affected if they integrate ESG factors. The limited understanding of the ESG integration techniques among other factors, are preventing investors from factoring ESG into the investment process meaningfully. More education is required in the entire investment chain, from asset owners to investment managers to companies, in order to further drive ESG investing.