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Source: Reuters/Fayaz Kabli
Pigeons fly past as a Kashmiri Muslim woman prays upon seeing a relic during Meeraj-un-Nabi celebrations at the Hazratbal shrine in Srinagar
Something remarkable is happening in Asia’s debt capital markets. Volumes are soaring across the board, new issues are performing well, and confidence is running high.
In a challenging time for risk assets, fixed income has emerged as the bright spot in an otherwise troubled Asian market. More importantly, it is transforming into a mainstream instrument – both for the region’s investors, and its issuers.
In part, that is an encouraging demonstration of confidence in Asia. Global investors now see many Asian securities as defensive investments – and that was certainly not always the case.
Yet, it is also down to many factors that are out of Asia’s control. Low interest rates in the US are pushing dollar-based investors further afield in search of returns, allowing Asian companies to fund at attractive yields. At the same time, Europe’s own troubles are forcing many investors – even central banks – to look for safe alternatives.
Asia’s debt capital markets, therefore, are finding themselves at the sweet spot for global investors. That begs the question of whether or not the new demand that is powering Asian bonds will still be there in years to come. However, it seems clear that bonds have become part of the toolkit in Asia – both for investors and for issuers.
This report delves into some of the key themes driving the rapid growth of Asia’s fixed income capital markets, not least the surge in demand from the region’s high-net-worth individuals, who previous shunned fixed income in favour of equities.
While new investors are emerging, so too are Asian companies embracing bonds as a corporate finance instrument, reducing their dependence on the bank market and finding they can benefit from longer maturities and often at lower costs.
The roots of those key shifts can be traced back to the collapse of Lehman Brothers in 2008, when the failure of traditionally strong institutions underlined the need for both sides to diversify. It may have taken a catastrophic event for Asia to open its eyes to fixed income, but it will take something equally unexpected to remove the momentum that is driving the region’s debt capital markets.
Today, Asia is leading the way in developing new products, and appetite for risk is flowing over into corporate hybrids and more complex bank capital instruments. High-yield will, doubtless, follow as yields elsewhere continue to come under pressure.
Questions remain over China’s ability to avoid an economic slowdown, and the threat of inflation is clouding the outlook for interest rates across the region. The only real threat to this structural shift, however, lies far beyond Asian shores in the shape of a sharp US or European recovery – and neither of those scenarios is looking likely.
