By Jean Chua, UBS Impact Editor
Valuations of Asian bonds haven’t been this attractive for a while but we remain selective in our fixed-income strategy.
With Asian high-yield credit yielding almost 9% now, investors seeking yield can consider diversified exposure to the space.
In addition, we also think investors can consider low-beta instruments that offer safe carry, which we see good value, with yields now higher and interest-rate hikes by the US Federal Reserve better priced in.
These instruments should help insulate investors against near-term volatility, which is here to stay because of tighter monetary policy and a decade of significant outperformance by the equity market.
UBS CIO Global Wealth Management expects the Federal Reserve to raise interest rates twice in 2019, and for the 10-year US bond yield to be at 3.20 percent in 12 months.
Higher rates and a flattened US Treasury yield curve have dampened the search for yield, reversing the trend of credit spread compression. We expect credit spreads to remain range-bound from here as investors re-focus on corporate fundamentals in their valuation of bonds.
A positive outcome is that credit-spread differentials between rating categories have widened over 2018, signaling better credit-quality differentiation.
Meanwhile, we remain cautious about using leverage to magnify returns, especially for lower-yielding assets including single-A bonds.
An alternative carry strategy is to borrow in currencies such as the CHF or the JPY, as the funding costs remain low.
However, we are also mindful of the foreign-exchange risk from currency mismatches. A key risk characteristic of safe-haven currencies is their inverse correlation to general risk sentiment. Both the CHF and the JPY tend to rally during periods of risk aversion, exposing investors to higher volatility.
Investors should bear in mind the overall investment environment: while growth will slow and monetary policy will continue tightening, a recession in 2019 looks unlikely. They should stay invested but prepare their portfolios for volatility.
For more information, please see CIO report “Investing in Asia Pacific: 2019 outlook – Navigating turbulence”.