“The tax amnesty in Indonesia has been impressive,” said David Tan, portfolio manager and chief investment officer for Asia Pacific fixed income. “It yielded a high amount of tax revenues, leading to low fiscal deficit and replenishment of foreign reserves.”
In that favourable environment, the country’s ongoing reforms are supportive of further investment and infrastructure spending.
Ratings agency Standard & Poor’s upgraded Indonesia’s debt to investment grade in May, matching the ratings by Moody’s and Fitch, and ending the long period of ratings disparity (Moody’s has rated Indonesia as investment grade since 2012).
As an effect of that move, Indonesian bonds will be included in the JPMorgan Government Bond Index Emerging Markets on 31 July.
The appeal of India’s reform
In the firm’s Asia fixed income outlook for the second half of the year, Tan said he was bullish on countries that had been pursuing progressive economic reforms.
While Indonesia, China and Japan fit the bill, India presents one of the best opportunities, he said.
Tan believes that India’s GDP growth is driven by the effect of the 2016 demonetisation, which he said resulted in wealth redistribution. There has also been a release of pent-up demand, salary hikes and growing exports.
In India, “inflation has always been tricky because of food prices”, said Tan. However, “the weather has been quite kind, so food prices have been going down and the CPI [consumer price index] inflation has continued to surprise on the downside”.
The country’s domestically-driven economy is less likely to be impacted by “deglobalisation”, should that trend strengthen, driven by possible US protectionist trade policies.
Both India and Indonesian government bonds yield between 6.5% and 7%, which is high for investment-grade government debt.
Moreover, the Indonesian rupiah has been stable in the last six months, while the Indian rupee has strengthened. With favourable carry and roll-down (when a bond price moves to par as it approaches maturity), as well as stable currencies, both markets are “a good investment for a long term”, said Tan.
Asian HY for Asians
As a sector, Asia high yield corporate bonds are particularly well positioned to weather anticipated interest rate increases, he believes.
Their sensitivity is lower than that of European or US high-yield bonds, thanks to the average yields over 6% and lower average duration, around 3 years. The default rates, at 2%, are on par with global emerging market average, according to data presented by Allianz GI.
Asian investor allocation to new issuance of Asian high-yield bonds has been steadily growing. In 2009 only 45% of new issue allocation ended up in the hands of Asian investors. So far in 2017, the figure is 80%.
“The foreign component has been shrinking,” said Tan, adding that it reduces the risk of foreign investors pulling out of the market, precipitating its collapse. “It shows the maturity of the market.”