Will the US Federal Reserve turn off the money-printing machine? Is China’s seemingly unstoppable economy losing momentum? At BlackRock in Asia, these are the kind of questions that face the credit team.

Anyone reading views on the global bond markets will have
noticed a nervous tone. Will the US Federal Reserve turn off the money-printing
machine? Is China’s
seemingly unstoppable economy losing momentum? When will the eurozone get its
act together?

These are the sort of questions with which Neeraj Seth, who
is head of Asian Credit at BlackRock – based in Singapore – thinks about a lot. He
is not alone; at an investment seminar in Switzerland for journalists a few
days ago and attended by this publication, much debate focused on when the extraordinary period of “quantitative
easing” might come to an end.

The overall bond market asset class around the world has,
apart from dramas such as in the bond bloodbath of 1994 or Russian default in
1998, been on a 30-year uptrend. That bull market may now be over. But even if the outlook from here is less rosy, there
are plenty of opportunities for managers to find value, particularly when some
emerging Asian debt markets are still relatively young and illiquid, Seth
reckons.

Family offices and private
banks are both “very active” investors in such bond funds, he said. “They
continue to be an important part of our distribution network,” Seth told WealthBriefingAsia in an interview.

“Despite all this talk about
the `Great Rotation’ out of bonds, we still see investors deploying capital
into the credit markets of Asia,” he
continued.

Seth likes to stress the benefit of working at the world’s
biggest asset manager with a vast research engine; BlackRock oversaw a total
of $3.792 trillion of assets under management as at the end of last year. That
puts it comfortably ahead of the likes of State Street, Vanguard; Fidelity, Pimco
(which specialises on fixed income), and JP Morgan Asset Management. Or put it
this way: when BlackRock speaks, people listen.

But market firepower isn't enough. The sheer number of analysts means all that capital can be deployed to best effect. (In total, more than 10,000 people work at this US-headquartered behemoth.) “You need to get strong
bottom-up research capability in your team,” he said.
“We have a very established team here and an average experience of 11 years or
more. That brings a lot of value to the table," Seth said.

Seth has the experience to see the bond market in historical
perspective. Prior to joining his current employer in 2009, Seth was a senior vice president
focusing on the Asia-Pacific market for R3 Capital Partners. He previously held
a similar role with the global principal strategies team at Lehman Brothers.
Previously, he was an associate partner with McKinsey & Company where he
was in the leadership group for the technology and telecom practice in Southeast Asia.

At two funds he is involved with, the BlackRock Renminbi
Bond Fund and the BGF Asian Tiger Bond Fund, performance has been mixed. At the
former, the fund is up 13.7 per cent since inception (11 November 2011),
beating the HSBC Offshore Renminbi Bond Index of 12.1 per cent. The other fund
has chalked up a cumulative performance over five years of 49.1 per cent,
against the JP Morgan Asia Credit Index of 53.6 per cent. (Source: BlackRock.)

Bond returns are still a lot
more attractive in the Asian region – with some exceptions – than in much of
the West, Seth said.

Asset allocations are suggestive of Seth's current thinking. The BlackRock Renminbi Bond
Fund (AuM of $198 million), the largest sector holding is financials – at 27
per cent – while capital goods make up only 1.5 per cent of the total. As for
the BGF Asian Tiger Fund, the country rankings are interesting: China makes up 21.7 per cent of the total
portfolio ($1.052 billion), while it is 16 per cent on India and Singapore,
just 3.2 per cent.

Within these broad
categories, however, undiscovered gems lie around, Seth said.

“Asian credits do offer
value; for historical reasons, Asia credit trades wider than the US and eurozone; there are pockets of value in Asia,” he said. “The key in the case of Asia
is that they are relatively new markets with a lot of first-time issuers,” he
said. “Overall, Asia has strong fundamentals
but it does vary a lot also by country.”

Certain sectors give Seth
some concern. He is mindful of a probable slowdown in the pace of GDP growth in
China,
and this is likely to affect sectors such as resources, to which BlackRock’s
credit funds have low exposure and in some
specific portfolios
“zero exposure”, he said.

BlackRock also has low
exposure to Chinese industrials, he said.

Growth

Seth and colleagues are
working at a time when the dollar-denominated and local currency markets have
been expanding fast.

The dollar-denominated market
has expanded from $65 billion as recently as 2011 to more than $115 billion in
2012 and so far this year, a total of approximately $75 billion of such
dollar-based Asia debt has been issued. This
includes sovereign and quasi-sovereign debt, as well as corporations.

One cause of growth, Seth
said, is financial dis-intermediation by traditional providers of credit,
notably banks. Firms are increasingly turning to the bond market as a source of
funding, he said. Banks are cutting the risk exposures; loan-deposit ratios are
edging up.

In the market where there is
new issuance from new entrants, the lack of comparable issuers and lack of
historical data throws up price mismatches which, if captured, can add Alpha to
a portfolio, he said.

Other markets showing growth
and potential are the RMB offshore bond markets – or “Dim Sum” markets, and the
Singapore
dollar-denominated markets. (To view a recent article on the Dim Sum bond
market, click here.)

So far, so good. But as Seth
said, there are a few clouds around to spoil the view. There are some concerns
about inflation pressures in parts of Asia, which means investors are fretting
about duration risk (sensitivity of bond prices to changes in interest rates),
and hedging that exposure accordingly.

With skill and a bit of luck,
Seth and colleagues hope that they get their broad calls right.