As fundamentals improve, bond yields have benefited from a corresponding reduction in the ‘emerging markets premium’. Countries such as China and India are pursuing bold structural reforms, and many Asian governments have managed to avoid the excessive entitlement costs that typically weigh down developed nations, leaving Asian sovereign bonds less susceptible to political and economic risks. Yields on Asian sovereign debt remain high by global standards, better positioning investors to preserve real returns in an environment of rising inflation and interest rates. Importantly, most Asian currencies also look undervalued in comparison to the US dollar, opening the door to additional currency-related gains on fixed income assets.

All of this means Asian bonds should be an integral part of any global investment portfolio. At the same time, it’s important that investment strategies grasp the full extent of this broadly positive picture. Asian sovereign bonds are only one aspect of the fixed income opportunity. Led by China, issuances by Asian corporates have grown exponentially in recent years, now accounting for about a third of the more than $12 trillion in local currency bonds outstanding in the region.¹

Asia’s corporates are set to be some of the main beneficiaries of the region’s rising prosperity. Default rates even on high-yield debt are low versus the rest of the world and expected to remain so given stabilising growth in China, the ongoing global recovery and broadly positive liquidity conditions. Asia’s high-yield sector combines high income potential with a relatively low correlation to US Treasuries. At the same time, the risks around high-yield debt mean investments need to be informed by a combination of bottom-up analysis of individual creditworthiness and top-down monitoring of interest rate and credit conditions.

In a volatile global environment where the withdrawal of monetary easing may blunt the ability of traditional fixed income strategies to deliver returns, a dynamic investment approach that draws on assets across the Asian debt universe is the answer. Because various segments of the Asia fixed income market deliver optimum performance in different economic or policy environments, investors should seek out strategies with the flexibility to blend local and US dollar-denominated bonds, and sovereign and corporate debt, and constantly optimise holdings to take advantage of shifts in market, policy or credit conditions.

Such an approach also ensures the manager, unconstrained by benchmarks, has the freedom to avoid markets or sectors with limited value or excessive risks. This helps a fixed income portfolio fulfill the risk management, diversification and income goals that have proven elusive for passive investment solutions that are largely limited to developed-world debt, or incapable of evolving in response to change.