Global monetary policy

Investors pile into ETFs as Asian monetary policy diverges from US, says BlackRock

PUBLISHED : Monday, 07 May, 2018, 11:40am
UPDATED : Monday, 07 May, 2018, 10:39pm

The US Federal Reserve may be raising interest rates, but Asian central banks are choosing to sit back. The resulting divergence in monetary policies is driving investors into nimble, fixed-income exchange-traded funds (ETFs), according to BlackRock, the world’s biggest asset manager.

The Fed kept its interest rate unchanged last week. However, there is growing consensus that the US central bank is gearing up for a 25 basis-points rate increase in each quarter of this year, picking up the pace from one rise per year in 2015 and 2016.

In contrast, while China, Korea and Singapore have shown signs of shifting towards a tightening policy bias this year, they are not exactly slamming on the brakes. The People’s Bank of China actually cut banks’ reserve requirement ratios last month, signalling that it wanted to lower commercial banks’ funding costs.

Despite Asian monetary policies being broadly in sync with America for decades, the divergence this time round comes as regional economic growth and inflation remain subdued. Currency appreciation over the past year in Asia was accompanied by a weak US dollar, which also reduced the appetite for local rate increases, analysts said.

This phenomenon is triggering demand for fixed-income ETFs, which provide more freedom to diversify and are cheaper to trade, as Asian investors continue their hunt for yield in a mixed interest-rate environment.

In 2015, Japanese investors turned to international fixed-income ETFs to seek yield overseas ahead of the Bank of Japan’s decision to diverge its monetary policy from the US, implementing a negative interest rate policy as the Fed saw economic conditions warranting the first steps in normalising its stance.

“Variable rate differences across countries and durations mean you need a nimble instrument to shift through fixed-income asset classes,” said Geir Espeskog, head of BlackRock’s ETF business iShares Asia Pacific distribution.

BlackRock saw US$2.5 billion of inflows from Asian institutional investors into fixed-income ETFs in the first quarter, compared to US$3.8 billion in the whole of last year. The New York-headquartered investment firm manages about US$6.3 trillion in assets on behalf of investors worldwide.

Bond prices typically have an inverse relationship with interest rate moves. So unless the global economic recovery is derailed, ETFs will be less sensitive to interest rate changes compared to sovereign bonds. 

An ETF, which is a benchmark that tracks a basket of securities, is listed on a formal stock exchange and can be traded during normal trading hours, unlike other mutual funds which are priced only once a day after market close.

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Chris Pigott, Brown Brothers Harriman (BBH) senior vice-president and head of Hong Kong ETF services, said opportunities were emerging for the launch of new fixed-income ETFs in Hong Kong given that not many have listed so far.

Buying of certain corporate bonds in the “over-the-counter” fixed income market was likely to result in costly price spreads and pose challenges for smaller investors looking to gain access. But choosing ETFs, on the other hand, would accommodate them while giving the same bond exposure and at a lower cost, Pigott said.

When asked what type of ETFs investors would like in their local market, 65 per cent of Hong Kong respondents said they would like to see more global fixed income ETFs, while 25 per cent opted for commodities products, according to a recent BBH survey of 100 independent advisers, intermediaries and institutional investors from Greater China. That trend was reversed for Taiwanese respondents, with 30 per cent choosing global fixed income products and 40 per cent commodities.

Meanwhile, 79 per cent of respondents said they were currently invested in fixed-income ETFs, higher than the 62 per cent invested in equity products.

“The income component of fixed income products is what larger institutions are looking for when judging the risk-versus-return dynamic,” Pigott said. “There is definitely interest here in bringing new fixed income products to the market to tap this demand.”

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