Bloomberg News

Franklin Favors Bonds of Korea, Indonesia on Currency Gains

July 27, 2011

July 28 (Bloomberg) -- Franklin Templeton Investments said it is boosting bond holdings in Asia-Pacific economies with the best-performing currencies, seeking to maximize gains as regional growth withstands debt crises in Europe and the U.S.

“Indonesia, Australia and Korea will be very attractive in the second half,” said Kim Dong Il, who oversees 3 trillion won ($2.8 billion) as chief investment officer for fixed income at Franklin Templeton Investment Trust Management Co. in Seoul. “The outlook for Asian currencies is good as the economies are making a major leap forward.”

The Australian dollar surged to a record high yesterday and a gauge tracking Asia’s 10 most-used currencies excluding the yen reached a 14-year high. The so-called Aussie, South Korea’s won and the Indonesian rupiah are the best performers of 2011 among the region’s 10 largest economies. Asia’s emerging-market economies will expand 8.4 percent in 2011, almost quadruple the 2.2 percent growth projected for developed nations, the International Monetary Fund said last month.

Indonesia’s local-currency bonds handed investors a 9.4 percent return so far this year, the most among Asia’s 10 biggest debt markets, HSBC indexes show. South Korean notes gained 3 percent. The $4.2 billion Franklin Templeton Asian Bond Fund is up 6.8 percent this year, outperforming 91 percent of its peers, according to data tracked by Bloomberg.

The fund, started in 2005, had 26 percent of its assets in South Korea, 20 percent in Malaysia, 13 percent in Indonesia and 9.4 percent in Australia as of the end of March. It bought ringgit debt to profit from China’s economic expansion, which boosts Malaysian commodity exports, Kim said. “Strict foreign bond investment controls in China” hamper direct investment in the world’s fastest-growing major economy, he added. China’s gross domestic product rose 9.5 percent in the second quarter from a year earlier, official figures show.

‘Healthy Status’

“It’s hard to find internal risk in Asia as the chance of a hard landing in China was lowered after growth numbers confirmed the healthy status of the economy,” Kim said. “Risks that are already expected, such as inflation and crisis in Europe, will cause fewer disturbances in the local markets.”

The average yield on Asian debt rose 22 basis points, or 0.22 percentage point, this year to 5.35 percent, according to emerging-market bond indexes compiled by JPMorgan Chase & Co. That compares with 6.43 percent in Europe and 8.98 percent for Latin America.

‘Steady Inflows’

“The Asian population is growing fast out of poverty to consume and developing nations in the region are starting to build more houses and infrastructure,” Kim said. “We will buy more bonds of these countries as there are steady inflows of money into our Asian fund.”

Mirae Asset Global Investments Co., South Korea’s largest mutual fund manager, plans to boost its cash holdings from the current 10 percent on concern European banks will pull money out of Asia should the crisis spread, said Kim Jin Ha, head of global fixed-income in Seoul. The fund had 5 percent of its assets in cash at the end of 2010.

Concern about deteriorating public finances in Europe have sent yields on Spanish and Italian 10-year bonds to the highest in more than a decade and prompted the region’s leaders to boost rescue funds meant to aid the area’s high-debt nations. In the U.S., lawmakers must agree on plans to tackle the nation’s debt and raise the borrowing ceiling before an Aug. 2 deadline to avert a default.

‘Risk Averse’

“Overall, investors will remain risk averse for a long period of time as Europe’s debt crisis harasses markets and Asia isn’t free from the risk of fund withdrawal,” he said.

Franklin Templeton favors Asian bonds maturing in less than two years and will boost holdings of longer-dated notes once inflation starts slowing in the region, reducing the need for central banks to raise interest rates, Chief Investment Officer Kim said.

The Reserve Bank of India increased borrowing costs for the fifth time this year on July 26, while policy makers in China boosted benchmark interest rates for the third time in June. Central banks in South Korea, Indonesia, Taiwan, Thailand, Malaysia and the Philippines have also raised rates. Australia’s last increase was in November.

“Inflation pressure is still high in the region and it is approaching the peak,” Kim said. “We will gradually increase longer-term bonds of countries that complete their rate-hike cycle. It would be probably from Australia and China.”

--With assistance from Saeromi Shin in Seoul. Editors: Anil Varma, James Regan

To contact the reporter on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.


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