In this edition, Amanda Hindlian our President of Fixed Income & Data Services shares her optimism over the growth of fixed income assets in Asia. You can also read our latest insight on the proposed liquidity requirements by global asset management regulators and a new whitepaper from BlackRock on bond ETFs.
I’ve just returned from Hong Kong and Singapore, where one theme stood out: fixed income as an asset class is flourishing. To be fair, it’s the extension of a global story as rate hikes and inflation woes cast a shadow on equities. In Asia, the theme has regional nuances. For example, much support comes from the growth of wealth - both for the upper middle class and high net worth investors - since rates were last this high. That’s at least a decade ago for several Asian markets, when fixed income ETFs were largely unknown to retail investors.
Now, they’re booming: one regional issuer noted in our conversation that they were seeing daily inflows of ~US$50 million in retail money into bond ETFs over recent months. Assets under management benchmarked to our bond indices - the bulk in Taiwan - are at ~US$15 billion, up from just over $US4.5 billion five years ago. Local issuers are cognizant of the fact that they’re now competing with international brokers for inflows. Unlike North American markets, it’s less a case of ‘bonds are back’ and more ‘bonds break through’ for a region where stocks, commodities and alternative investments have traditionally been more popular.
For retail investors, the attraction is clear: yield. Asia investment grade debt has returned ~9.1% since last November while US investment grade paper has returned ~7.6%. For those with the stomach for greater risk, Asian high yield paper has notched an eye-popping 25.1% in the same period. Yet overall, the flight to quality in other markets is also clear in Asia, with liquidity drying up in the Chinese high yield space amid a backdrop of macroeconomic uncertainty.
Greater comfort with the asset class is also evident among high net worth investors, many of whom are showing a preference for the higher risk-reward of owning direct bonds versus funds, especially in markets like Taiwan. More broadly, while Hong Kong remains the regional epicenter for trading, a massive shift in capital continues, with markets like Singapore benefitting. Could this see the status of Singapore rise as the financial hub for fixed income and wealth management? What are the wider implications of fixed income growth for the region? Like many of you, I’ll be watching this space.
1All figures discussed in this article are based on data from ICE Data Services as of 5/19/23
Data in Action
Financial market upheaval is typically accompanied by higher volatility and reduced liquidity as participants trim risk and tighten counterparty oversight. These hallmarks were evident during the Global Financial Crisis of 2008-09 when investment firms shunned the so-called “alphabet soup” of securitized products, selling or avoiding CLOs, CDOs, and MBS. Other examples include the EU sovereign debt crisis, when government bonds issued by “PIGS” nations (Portugal, Italy, Greece, and Spain) were blacklisted, and in the municipal space during major bankruptcy events. Astute risk management during these shakeouts relies on nimble, efficient analysis of information.
Insights
Global regulators in Europe, Asia and the United States are scrutinizing fund liquidity requirements in the wake of the pandemic and recent market volatility. The aim: to bolster sector resilience, maintain market integrity, and strengthen funds ability to meet redemption requests. Here, the protection of retail investors and reduction of systemic risk is in sharp focus, after the pandemic ‘dash for cash’ in March 2020 and the U.K. pensions crisis last year.
Insights
Over the next forty years, ICE’s analysis projects the duration and severity of droughts across the United States will likely increase due to climate change. The effects could be far-reaching and profound: in 2015, drought conditions in California caused over $1.5 billion in agricultural losses and over $2.5 billion in total losses. Drought conditions may also directly impact human health—dust and wildfires can worsen air quality and put people with lung diseases and asthma at higher risk of irritation and infection, and newly stagnant water creates mosquito breeding grounds that have been linked to outbreaks of West Nile Virus. Widespread food shortages and rising prices that result from drought can affect populations well outside areas directly affected.
Insights from BlackRock
A watershed moment in bond investing is occurring and the opportunity is profound. After last year — the most challenging bond market in decades — yields are back across most fixed income sectors. As a result, there are strong flows into fixed income assets, much of which are migrating into bond ETFs as investors adjust risk and recalibrate portfolios to higher yield levels. This new fixed income paradigm is accelerating bond ETF adoption — a trend that paradoxically gathered speed in 2022 despite the challenging bond market and was most recently evident in March 2023 when volatility was triggered by concerns about the banking sector. Once again, investors turned to bond ETFs to adjust their portfolios and navigate market uncertainty, reinforcing the more traditional “flight to safety” role of bonds.
Global regulators are looking to improve fund liquidity requirements as part of the post pandemic review and recent market volatility. They are seeking to strengthen buy-side liquidity management programs to help boost transparency and bolster sector resilience. The areas of focus are common across several jurisdictions such as liquidity stress testing, liquidity classification, and liquidity management tools.
Join experts from ICE and FactSet to learn about the proposed changes and their impact globally.
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