Asean wins the nod of Asian G3 investors largely because of Indonesia. But six months since Asset Benchmark Research (ABR) pitched the question of where to be to achieve the best risk-adjusted return, the smart money is starting to rotate into China credits.

 

In October 2016, ABR asked bond investors to rank which credits would provide the most reasonable risk-adjusted return over the next 12 months. Out of the total, 36% of respondents ranked Asean at the top; three in ten opted for China; roughly a quarter picked India and only 2%, Korea.

 

An oil price recovery as well as the relatively robust economy in the latter part of 2016 helped to drive returns in credits such as Indonesian sovereign and quasi-sovereign names. However, they are slowly moving out of favour. In Indonesia, interest rates have come down and inflation is on the rise.

 

Volatility is also an issue and even though the Fed rate hike cycle is largely priced in, there could still be moves with duration playing a larger role. “When you look to Indonesia and to some extent India, generally speaking you have relatively high-quality, but also longer-dated instruments. I suspect they’ll be a little bit more volatile,” says Bryan Collins, portfolio manager at Fidelity International.

 

Instead the focus is shifting to China. “I would choose between China and Asean,” says Wilfred Wee, a portfolio manager at Investec Asset Management.“ China manages its currency as a basket as well as Asean as a whole. The rest will be a bit idiosyncratic and to be fair I don’t think that there are any strong stories.”

 

Collins shares this view. “Where I think the real value would be is from a risk-adjusted or volatility-adjusted perspective where some of the names within the China complex, which is huge and getting bigger, are probably going to be the sweet spot for low volatility, reasonably attractive, single digit total returns.”