Asian currencies and emerging market bonds look set to outperform their Western counterparts, asset managers say, as better growth prospects buoy the region's economies and lure overseas investment into the region. 'Emerging-market governments displayed remarkable fiscal discipline during the economic downturn,' said Richard House, the head of emerging market debt at Threadneedle, this year as the fund manager noted emerging markets are still 'great value'. The asset management company noted last month that emerging market bonds 'remain an under-owned asset class', and advised an overweight position in them. Fiscal and financial circumstances are healthier than in the West, with emerging economies not exposed to the debt problems in the European Union, while locally denominated bonds offer better relative value and a currency play. 'From an investment perspective, sound fiscal policies, independent inflation-fighting central banks and economies that are leading the rebound in global growth will support both local currencies and domestic bond markets across the emerging world for years to come,' House added. For bond investors, yields are considerably better in Asia. Any returns in local currencies will also be boosted if they're translated into US dollar terms. 'Across a majority of Asia-Pacific, real yields remain attractive,' HSBC strategists Andre de Silva, Virgil Esguerra and Seong Ki-yong write in their latest global fixed-income strategy report. With low inflation in most of Asia, they note that real returns are attractive, with the most significant real yields in Indonesia, India, South Korea, the Philippines, Thailand and Malaysia. Five-year real yields approach or exceed 1.5 per cent in all those countries, and are double that in Indonesia and India. 'Such sizeable prospective real returns have been a particular enticement for foreign inflows, in addition to currency considerations,' they note. 'In comparison with the US, such real yields in Asia are appealing.' Actual yields on US bond products, such as the five-year Treasury Inflation Protection Securities, recently turned negative, with the very low interest rates not keeping pace with inflation. The one exception is India, where yields may be very high, but the Reserve Bank of India is likely to embark on additional tightening to ward off demand-driven inflation. HSBC recommends a defensive stance to Indian bonds. The analysts overweight bonds in Hong Kong, Singapore and Thailand, where foreign investors have moved substantial amounts of money into Bank of Thailand bills, and underweight in the Philippines, Taiwan and South Korea, where HSBC believes the prospect of near-term tightening by the Bank of Korea is underestimated. Like Threadneedle, they suggest that the general stance is positive on Asian currencies and bonds. That's a view echoed by Ramon Maronilla, the senior product engineer for fixed income products in Asia at State Street Global Advisors. 'We are very positive on Asian currencies,' Maronilla says. 'Asian growth is expected to be robust, and global dollars are expected to chase those assets. We believe Asian assets are more attractive, within the emerging markets and compared with the more developed markets.' The downside for Asian bonds is that they tend to suffer at times of risk aversion, as occurred during the Asian financial crisis, when investors sold off Asian and emerging market bonds and equities, and often repatriated huge sums of money into the 'safe havens' of US Treasuries and Japanese government bonds. The US dollar and Japanese yen remain unexpectedly high in value two years after the height of the financial crisis. But the long-term direction of those currencies is likely to see them weaken. 'Most investors don't really have a positive view on the US dollar, especially right now, given the weakness in the US economy and the potential for a second round of quantitative easing,' Maronilla says. 'The massive stimulus spending in the US will weigh on the dollar. 'On the euro side, there are fiscal austerity measures that we expect would drag growth and lure money from euro assets. The yen has already appreciated a lot, and there is the risk of government intervention to drive it down.' State Street created the ABF Pan Asia Bond Index Fund. Such products are denominated in US dollars, but holding underlying bonds in the local currencies of the eight Asian nations it targets should see returns enhanced if Asian currencies appreciate. 'We're not saying investors should put all their money in Asian bonds and sell all their developed currencies, but we believe it is an opportune time to diversify,' Maronilla says. 'So, we believe Asian bonds are a good asset class to diversify into.' What could go wrong? Societe Generale notes that there is a fine line between what the French investment bank sees as the 'fourth wave' of capital flowing into emerging markets and hot-money flows. 'With global liquidity ample, there is a risk that this liquidity could make its way to emerging markets, fuelling asset-price bubbles, followed by the inevitable asset price bursts,' states the company's global economic outlook for last month. 'Authorities are very vigilant on this point, and are likely to be quick with new measures if such flows are perceived.' Growth prospects in emerging markets that are closely tied to the West through exports, such as South Korea and Mexico, are also at risk if the US suffers any new economic tremors. The 'decoupling' of Asian economies from the West has been long awaited but, in a world that is becoming more globalised, that seems unlikely. Asian economies that once depended almost entirely on exports have proved more resilient in this last downturn and have been quicker to recover, thanks to stronger local demand. 'A quick glance at the broad and narrow money supply measures shows that there is no freeze here,' Societe Generale says of Asia. 'Moreover, it seems that many of these economies still have ample resources to draw upon should the external sector falter.' For investors looking for safe havens, Asian bonds may be one of the few places that offer protection and reasonable return prospects. With yields on Japanese government bonds at 0.63 per cent, US Treasuries at 1.41 per cent and German bunds at 1.47 per cent, there's little in the way of returns from Western bonds, with plenty of currency risk. 'There's really not a lot of good alternatives out there if you want exposure to currencies where you have constructive prospects and still earn a decent yield,' Maronilla says.