Among the many keywords of 1H 2019 in Asia, it is not difficult to spot a few interesting topics, such as trade conflict, Brexit, BRI, and, most recently, the social turbulence in Hong Kong. Since Asia is a highly diversified market in itself, representing much pragmatic demand for growth, value generation and developmental issues, Europe becomes an interesting value-added market to Asian investors. But what is the core value of Asia to institutions as well as individuals who live and invest in this continent? It is alpha and the commitment to deliver growth for its own future.
The ending of 2018 was a ‘to be or not to be’ challenge to many Asian bond managers. Over 55% of Asia credit index was constituted by Chinese debt issuers, which increased the conductivity of this segmented market. Despite the styles of investment, the depth of credit research stretched the capacity of many investment teams that either actively or passively invested in China. PMs who live with strict performance appraisals struggled to hand in a decent scorecard had to reduce portfolio duration below 2yrs. Two different worlds appeared based on the nature of capital under management. As for the gift of 2019’s New Year, most bond investors received negative return except for China & S.Korea. Although not all redemptions were triggered by the declined market performance, clients do live under pressures such as the invisible cost of capital. This appears to be a critical element that is neglected easily by PMs.
Let’s refocus on the emergence of Chinese USD bond market, which is now a significant segment of Asia. The counted 195bn USD outstanding of Chinese USD bond (中资美元债) mainly contains corporate debts spread out between 1-3 years at an averaged yield of 6.73%. The issuance structure to some extent reflects challenges that Chinese corporates are facing in their domestic market. Real estate and financials are two major sectors. From the real-estate developers’ perspective, strong players are still strong. But the less competitive companies would struggle to raise funds from offshore markets. This will add to the accumulating pressures from the tightening regulatory requirement, which aims to stabilise the bubble.
It is not difficult to see who the initial investors participating in this space are. More than 60% of QDII investors are investing in offshore USD bonds are already acquainted with the issuer names. Chinese banks address enormous interest as they often are the same lenders in their domestic market. For the ungraded issuance, Trust company, managers with less capable active management capacities, are also heavily involved. We had every reason to believe that this is shadow banking behavior. However, it is destined to change before the end of 2020 due to the new rule on the asset management business. There is no doubt about the strong growth of the Asian bond market. From the ETF’s perspective, the market is growing by 40% annually, in contrast to an average of 15-20% growth in the U.S. and Europe.
We should keep our eyes on the growth and development as we wished for. Vietnam and Chinese STAR board are two highlights we shouldn’t ignore.
Vietnam is a rapidly developing economy that delivered a 7% approx. growth in the past few years. The country is strongly positioned to benefit from numerous free trade agreements, and it has a steadily expanding population, which is expected to grow until 2050. The estimated growth of Vietnamese GDP retains between 6-6.5% in the next 10 years. By 2029 the country will surpass Singapore’s economic scale. Vietnam is increasingly attracting investors in Asia.
Despite 124 billionaires being recently created on STAR board in Shanghai, China’s passion on technology and innovation will light up a path for its future. Stocks, such as advanced manufacturing, new material, clean energy, cloud service, telecommunication, agricultural technology and many more new economic terms presented strong potentials of 520% upsoar on the first day of trading. Under current geopolitical environment, it is INNOVATION that offers a new perspective to rethink the means to generate economic growth for both single countries and regional markets. The approach to deliver innovation and linking it to wealth generation is equally important to the safeguard of this new and long process.
The value of Asian assets is embedded in the shortest turnaround between economic slowdown and development opportunities.