Eurobonds unlikely to tempt Asia investors
Scrambling to find solutions to the euro zone debt crisis, Jose Manuel Barroso, president of the European Commission, and other influential voices have floated the idea of a new type of bond.
Essentially, the 17 nations that use the euro currency would issue bonds jointly, not as individual member states. The main objectives would be to enhance general confidence and stability, reduce borrowing costs for the most indebted countries and, by engineering a new way to borrow, lower the pending risk of default.
Before taking such a step, many technicalities - large and small - must be resolved. One thing, though, is already becoming clear. If those behind the plan expect the concept of eurobonds to attract significant interest from private banks and wealthy investors in Asia, they are likely to be disappointed.
'As a general observation, for this asset class, we basically advise our clients to invest in corporate bonds with less financial exposure, particularly in the emerging markets,' says Jean-Claude Humair, regional market manager in Hong Kong for UBS Wealth Management. 'We have seen very strong demand for dim sum bonds because of the focus among Asian clients on the renminbi. And we look at the investment-grade bond market, which is typically very liquid.'
In uncertain times, he suggests, there is little reason to put money into untried euro instruments, conceived in crisis and so far welcomed only by the weaker economies. For clients used to more aggressive investment strategies, the high yields now offered in core European countries might have attractions.
'Investors with strong views and the stomach for volatility might look, for example, at investment-grade government bonds in countries such as France or Italy in the context of a diversified portfolio,' Humair says. 'But I would suggest the peripheral countries are currently not good options.'
Pinpointing the same concern, Maggie Tsui, deputy head of investment services for Asia at BNP Paribas, says bonds issued by Italy, Greece and Portugal are facing the headwinds and the bank is advising clients to avoid them. BNP is steering clients towards Asian sovereign bonds such as those issued by the Philippines, Indonesia and China.
Stephen Corry, Asia-Pacific head of investment strategy for LGT Bank (Hong Kong), believes that Greece is insolvent and increasingly likely to default. As a result, some corporate bonds in EU countries other than Greece are arguably a better bet than the usual 'safe haven' government bonds, assuming the relevant backers continue to prosper and make good on their debt obligations.
'Traditionally, government bonds have always been lower risk, and that is still the case,' Corry says. 'After all, governments can tax companies and individuals, and that ability to generate revenue has always made them a better credit than corporate bonds.'
He leaves unstated the implication that accepted thinking and the usual guidelines should not be taken as read. For instance, in the mind of the wider investment community, a lot of EU-related bonds may still be classed as attractive. The fact remains, though, that EU growth is slowing and could slow further if near-term resolution of the debt crisis continues to prove so difficult.
'Under that scenario, preservation of capital becomes paramount,' Corry says. '[For bond investors], defensive names would make sense - telecom companies, utilities - although their yields have come down. Investors need to be selective and focus on companies they believe can continue to generate solid cash flows.'
Tsui says United States Treasuries are a good option in the short term, but for medium term BNP is advising clients to be cautious on them. 'As long as the US dollar maintains strength, we would say US Treasuries are a good choice in the short term,' she says.
Overall, the preference would be to pick bonds of multinationals with substantial overseas interests that are generating income outside Europe. In contrast, so-called peripheral sovereign bonds have little going for them.
'They are likely to suffer further losses until there is a resolution in Greece,' Corry says. 'Without ECB [European Central Bank] intervention and bank recapitalisation, the situation could deteriorate further.'
Chew Soon Gek, head of portfolio management and investment strategy for Asia at Clariden Leu, says a lack of visibility on approaches to solving the European debt crisis is a major concern. Credit markets have priced in a significant downside, yet many unknowns remain - notably how the EU, International Monetary Fund and ECB will co-operate over debt relief, terms and timescales.
This is pointing investors towards more defensive plays in the corporate bond market.
'We prefer non-financial, non-peripheral and cash-rich companies to pick up some yield,' Chew says. 'Our macro-base case is one of slow growth in 2011 to 2012 and not an economic slump. But we expect that further recapitalisation lies ahead for some European banks.'