Should Asian debt now be seen as a mainstream asset class? Chia-Liang Lian, manager of the £737m Legg Mason Western Asset Asian Opportunities Fund, believes so. Global bond indices have traditionally tended to be weighted towards the West, though he pointed to a decline in the G7’s share of world GDP from roughly two-thirds to about half in the past 10 years.
“Yet the weights assigned to emerging Asia in global benchmarks including Citibank’s WSPI are currently less than 3%, which shows a clear disconnect between the economic reality and the benchmark weightings,” he said.
Furthermore, he stressed that the trend away from the G7 comes at a time when sovereign rating trajectories are demonstrating a similar divergence.
Vulnerable to downgrades
“A decade ago, just three of the 10 largest Asian economies were rated A or above by S&P,” he said.
“Today this ratio has doubled to six, with Hong Kong and Singapore rated AAA. Meanwhile in Western Europe, where countries were uniformly rated A or higher 10 years ago, ratings are now distinctively more mixed and even the best quality sovereigns are now vulnerable to downgrades as we have seen in the last couple of weeks.”
Asian economies having outpaced developed countries by about 6% on average over the past decade, which the manager believes has led to a significant build-up in external surpluses across the region.
“These surpluses have meant many Asian countries are now key exporters of capital to the rest of the world, with the resulting accumulation of reserves acting as a form of self-insurance in periods of exogenous pressure,” he added.
“It is no surprise that compared to earlier years, the recent market volatility in Asian currencies has declined noticeably, precisely because policymakers are now more adequately equipped to minimise unintended currency fluctuations due to external forces.”
