The sovereign debt crisis in Greece seems to have turned a corner with the announcement of another European Union bailout, albeit one that involves potentially steep losses for bond investors.
The question for the expert panel this week:
How would the resolution of the euro-zone sovereign debt crisis affect regional bond markets?
Sen Sui (head of Asia, markets and investment solutions, Credit Agricole Private Banking) says most bonds in Asia are issued in US dollars, which are affected more by the movement of US Treasuries than the euro-zone sovereign debt.
'Therefore, the impact of the euro-zone sovereign crisis will be more on the risk-seeking sentiment of investors,' he says.
Sui adds that, while the recent euro-zone summit has provided a relief for Greece, the sovereign debt crisis in the euro zone is unresolved. Add the risk of a US default, and Sui suggests people hold gold instead of 'risk-free assets' such as the German Bunds or US Treasuries, which 'are also sensitive to inflationary pressures and political issues surrounding debt treatment'.
Magdalene Teo (senior analyst, fixed income research, Bank Julius Baer) says the beneficiaries of the EU ministers' package are the sovereign bonds of peripheral nations, bonds of banks in these countries and bonds of banks elsewhere that are exposed to them.
Asia has little exposure to peripheral Europe, so Asian bonds have been fairly stable through the whole crisis, says Teo. Year to date, emerging market bond funds have registered net inflows, unlike emerging market equities, which are seen as riskier assets and have registered outflows.
'We like select Asian high-yield sovereign and corporate bonds, on improving fundamentals and potentially positive rating upgrades,' says Teo.
Yonghao Pu (chief investment strategist Asia Pacific, UBS Wealth Management Research) says the EU agreement will buy some time but does not offer a final solution.
'The agreement does not resolve the fundamental problems, which depend on whether the affected countries can regain economic growth that would allow them to improve their financial conditions,' says Pu. 'Greece is still likely to default in 2012, and whether the size of the package is enough to prevent contagion to Spain and Italy remains in question.'
As sovereign debt issues remain a major risk in Europe and the US, Pu prefers emerging-market equities and high-yield corporate debt.
In Asia, Pu likes Chinese state-owned enterprises and quality high-yield credits. He advises looking into the yuan and Singapore dollar-denominated bond markets due to the appreciation potential of the currencies.
Cecilia Chan (CIO of fixed income, Asia Pacific, HSBC Global Asset Management) says in uncertain times, investors tend to favour their home markets. Once the euro-zone crisis is definitively resolved, Chan expects foreign investors to increase their Asian exposure.
She notes the foreign holdings of local Indonesian government bonds have been stable in recent months, and that this could increase with a certain end to the crisis.
'If the euro sovereign situation is resolved, we anticipate that the local currency bond markets and the US dollar high-yield corporate sector will outperform,' says Chan. The Indonesian market is benefiting from a recent softening of inflation, which has led the central bank to keep interest rates on hold.