Amidst increasing geopolitical tensions, Singapore-headquartered Eastspring Investments, a $278 billion asset management business of Prudential, discusses the investment case for Asian bonds, and its role in income portfolios.

Rong Ren Goh, head of macro and thematics at Eastspring Investments, believes that Asian bonds’ lower correlations with global bond markets in periods of market stress and competitive long-term returns can help improve risk-adjusted outcomes in investors portfolios.

“Investors have traditionally turned to developed market (DM) bonds as a source of income,” Goh said in a note. “In seeking stable and predictable cash flows, income investors have viewed developed market bonds as offering greater stability, credible policy frameworks, stable currencies and more durable real returns. However, this long-held narrative has begun to shift.”

“Asian bonds have remained relatively resilient to date, with the JP Morgan Asian Credit Index down less than 1 per cent year-to-date,” Goh continued. Part of this resilience, he believes, comes from Asia’s improving long-term macro fundamentals. while many developed markets are experiencing high fiscal deficits and rising government debt.

“In emerging Asia, fiscal discipline has been steadier, and inflation better contained,” Goh said. “Policy credibility remains largely intact and real yields are positive for the right reasons. External balances are also healthier and domestic savings in the region continue to rise.”

Although geopolitical tensions and the Middle East conflict has caused the dollar to strengthen, Goh said the dollar appears overvalued on several measures including the Real Effective Exchange Rate. The US’ Net International Investment Position (NIIP) is also at its most negative level since 1975. “A negative NIIP means that the foreign claims on US assets are larger than the US’ claims abroad. This extended position makes the dollar potentially vulnerable and biased lower should foreign investors seek to diversify their investments and foreign reserves away from dollar assets, after reassessing the US’ fiscal sustainability,” Goh said.

“Asian dollar bonds have been able to show greater resilience during periods of market stress. This was seen during the 2022 global rates and credit sell-off, when aggressive global monetary tightening drove deep and simultaneous losses across many traditional defensive assets,” he continued.

In the Iran war, Goh highlighted that Asian Investment Grade (IG) bonds have outperformed US and European IG bonds month-to-date. “We have also seen correlations between Asian credit and global bond markets decline during periods of heightened stress. This differentiated behaviour can help cushion portfolios during global risk-off episodes,” he said.

The UK’s Standard Chartered is also underweight in developed market government bonds and prefers emerging market bonds. Asia makes up 70 per cent of emerging markets.

Despite the Middle East conflict, this week Standard Chartered said that emerging market countries’ fiscal balances are generally strong, and their bonds offer attractive relative value versus their developed market peers. It is overweight in both emerging market dollar sovereign bonds and emerging market local currency government bonds. It also retains its neutral allocation to Asia dollar bonds. “These bonds continue to offer reasonably attractive nominal yields, favourable supply-demand dynamics and strong credit fundamentals supported by higher cashflows, relatively low leverage and a higher share of sovereign or sovereign-linked issuers,” Standard Chartered said.

In the Middle East conflict, Goh said that current account surpluses in many Asian economies can provide some cushion to absorb higher energy costs. Meanwhile parts of Asia continue to benefit from the strong demand for AI-related exports.