FUND MANAGERS CAUTIOUS ON ASIAN BONDS AS INFLATION SOARS
07/05/2008
Higher inflation in Asia could weigh on the region’s bond markets, but those who invest in local currency bonds can still benefit from stronger currencies.
MUMBAI (Dow Jones, 24 April 2008) - Pacific Investment Management Co. is betting on Asian currencies and avoiding sovereign debt, as interest rates across the region rise to curb inflation, the managing director of its Asia Pacific operations said.
"When we look at Asian debt markets right now with this new plane of higher inflation, it doesn't make the current yields look terribly attractive," Douglas M. Hodge told Dow Jones Newswires in a recent interview.
Pacific Investment Management, or Pimco, is a unit of Allianz SE (AZ) and is the world's largest fixed income manager in terms of assets under management.
"We are rather cautious and defensive on Asian bonds. We are not as largely invested in Asian bonds as we were," Mr. Hodge said.
He didn't elaborate on how much the fund has invested in Asian bonds.
Despite a slew of fiscal and monetary measures, soaring global food and energy prices have jarred most Asian economies and brought alive the possibility of higher interest rates.
Inflation in China was the highest in nearly 12 years in February, while Singapore is currently facing a 26-year peak. Authorities have responded in many countries by raising interest rates and asking banks to set aside more cash as reserves.
"As of now, many monetary authorities in Asia are challenged with this problem of adjusting to the new economic reality. So we are watching it very carefully," Mr. Hodge said.
But he is very optimistic on emerging market currencies in Asia which "seem to be on an upward path of adjustment."
Outlook good for Asian currencies
The outlook stems from the possibility that these currencies could be allowed to appreciate to combat inflation, Mr. Hodge says.
He said the current regulations for foreign investment in sovereign debt in India made the bond market inaccessible for a big player like Pimco, which had US$746.3 billion in assets under management as of December 31, 2007.
The Reserve Bank of India mandates that the sum of all foreign institutional investments in government bonds cannot exceed US$3.2 billion in a fiscal year.
"The allowed investment is a very small fraction of the total size of the (Indian bond) market. So for all intents and purposes, we cannot enter the market," Mr. Hodge said.
The daily trading volume in Indian government securities is around US$1 billion.
But on a longer-term perspective, opening up the bond market for investment would be beneficial to the country's economic growth, he said.
"The cost of capital for a private entrepreneur or companies that want to raise capital for expansion is high. They are not getting the full benefit of the global capital markets," Mr. Hodge said.