This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.
Emma Wall: Hello and welcome to the Morningstar series 'Why Should I Invest With You?' I'm Emma Wall and I'm joined today by Neeraj Seth, Head of Asian Credit for BlackRock.
Hello Neeraj.
Neeraj Seth: Good morning.
Wall: So we're here today to talk about fixed income within Asia region and I have been speaking to quite a lot of Asia equity fund managers this week who have been telling me to stop thinking about Asia as a homogenous region and start thinking about it as very different entities that make up a heterogeneous asset class. Is that same with bonds?
Seth: Absolutely, absolutely. And to some extent if we think about the key drivers for the markets next year which is going to be the Fed rate hike and the pace of the tightening cycle, the China slowdown and the impact of that and other risks in the market. The behavior, or the performance, of the different parts of fixed income and credit in Asia is going to be very different.
Wall: So if anything it's going to become even more dispersed.
Seth: Absolutely. I think coming back to the point about dispersion which you would have heard from a lot of equity managers. I don’t think it will be any different in fixed income and credit. You would need to get your country, sector and security selection right. So if at all I'm actually quite excited about 2016 because with the dispersion you will see more and better investment opportunities if you can get those factors right in your portfolios.
Wall: For active managers.
Seth: Absolutely for active managers.
Wall: You talked there about the Fed rate hike. That of course is a risk to bonds globally. How concerned are you by that, what are the risks on your horizon?
Seth: So to some extent the market has moved away from the timing of lift off which we expected to be December to the pace of tightening. And given what we have seen and heard so far and given obviously the growth and inflation mix we do expect the pace to be gradual.
So if you do go through a gradual cycle you might not have the same kind of headwinds for Asia or emerging markets what people were worried about or have experienced in the past. So at this point my base case is yes, something to keep an eye on, but no I wouldn’t expect it to be a big headwind for the market.
Wall: I think people who are unfamiliar with investing in this region tend to think, okay, I know what the risk profile is of a U.K. corporate bond or a U.K. government bond. Investing in Asia that’s much more risky. Do you think that’s a fair assumption?
Seth: I think it's a little more mixed. So making a generalisation; coming back to the point that Asia is not a homogenous region, is actually a little bit incorrect. And the reason I say that is when you look at let's say, if you look at the credit markets across the region. You have all the way from triple A issuers to single C issuers.
So you do have a whole breadth of issuers coming to the market with very different credit risk profiles. There are pockets of risk which are different around legal jurisdiction and creditor protection related details. But I don’t think that you can generalise for the whole region.
Wall: Okay. Then so if it's not, this is not a case of you being worried about the Fed raising rates what are you worried about. What could be the blip on this sort of rosy 2016 horizon?
Seth: Well, I think it's overall I do expect the volatility to be higher and hence obviously you do have to be ready to take more of that volatility in the portfolios.
China slowdown as I said will have different implications for different countries, different sectors and different credits. We have to be able to differentiate that when you think about building the portfolios. So it's going to be much more of active security selection than one would need to do in 2016. The part which is I would say somewhat unclear at this point and a bit of an unknown is the geopolitical risk. Clearly the risks are going higher, but that’s something which is very hard to predict or call in terms of the events that you would see in 2016.
Wall: So what then about the opportunities? You mentioned that China slowdown might actually be good to some people.
Seth: Well, overall if you really think of the indirect implication the slower China has obviously caused a lot of decline in the commodity prices. Now when you think of Asia-Pac as a region and then you go into specific countries what you would realize is Asia-Pac as a region is a net importer of oil and commodities and look at the price decline in both of those oil and the hard commodities and then you look at the specific countries.
So you have India a large net importer which obviously benefits significantly. China benefits from it, it's a net importer of oil and commodities, Philippines, Vietnam, Korea so there are number of countries across the region that do benefit from the drop in commodity prices which has happened because of slower China.
So you do need to look at the second level and the third level effect of that and say which are now the winners and losers in the region because of the shift in the global growth and the global inflation paradigm.
Wall: So there is plenty to be cheerful about.
Seth: There is plenty to choose from. There is obviously – it doesn’t come without risk, but at the same time there will be plenty of opportunities to generate returns.
Wall: Neeraj, thank you very much.
Seth: Thanks a lot.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
