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BNP Favors Asia Dollar Bonds as Samsung Asset Avoids Rupiah

September 28, 2011

(Updates prices from second paragraph.)

Sept. 28 (Bloomberg) -- The worst quarterly slide in Asian currencies in three years is spurring BNP Paribas Investment Partners and Samsung Asset Management Co. to shift funds into the region’s dollar-denominated bonds.

Asia’s local-currency debt lost 1.5 percent this quarter through yesterday, while dollar notes declined 1.4 percent, according to HSBC Holdings Plc indexes. The Bloomberg-JPMorgan Asia Dollar Index dropped 3 percent since June 30, set for the worst quarter since September 2008, as Europe’s fiscal crisis and a U.S. economic slowdown damped appetite for riskier emerging-market assets. India’s rupee and South Korea’s won dropped 9 percent. Malaysia’s ringgit fell 4.7 percent and Indonesia’s rupiah weakened 4.2 percent.

“We have reduced everything to zero in the Asian local- currency space and put everything into dollars,” Adeline Ng, who helps oversee the equivalent of $21 billion in Asian assets as regional head of fixed income at BNP Paribas Investment Partners, said in a phone interview from Tokyo on Sept. 23. “This risk aversion will continue in the near term given there’s a lot of uncertainty coming from the euro zone.”

Foreign ownership of Indonesian debt fell 11 percent from an all-time high of 251.23 trillion rupiah ($28 billion) on Sept. 9, according to data on the nation’s Finance Ministry’s website. Net additions to overseas holdings of Korean debt shrank 95 percent in August from July to 134 billion won ($115 million), figures from the Financial Supervisory Service showed.

Emerging-Market Outflows

Emerging-market bond funds had their biggest net capital outflows since the second quarter of 2009 in the week ended Sept. 21 as investors withdrew $692 million, including $464 million from local-currency funds, EPFR Global data show. In the past three weeks, developing-nation dollar debt funds posted inflows of $99.4 million, while funds focused on local currencies took in $24.9 million. U.S. Treasuries rose 5.8 percent as about $9 trillion in global stock-market value has been erased since June.

Failure to combat the turmoil spurred by Greece threatens “cascading default, bank runs and catastrophic risk,” U.S. Treasury Secretary Timothy F. Geithner warned over the weekend. The International Monetary Fund lowered its forecast for 2011 global economic growth this week to 4 percent from 4.3 percent. Developing Asia will grow 8.2 percent this year and 8.0 percent in 2012, IMF estimates show.

Samsung Asset, South Korea’s biggest fund manager, may avoid purchases of Asia’s local debt when it starts a global fund later this year because of the region’s exchange-rate declines, according to Sungjin Park, Seoul-based chief investment officer for fixed income.

‘Flight to Quality’

“With new money coming in, we refrain from parking it in local-currency debt because global financial uncertainties persist and the flight-to-quality trend favors the dollar,” Park, head of the $69 billion debt division, said in an interview on Sept. 26. “The risk for further weakness in emerging-market currencies remains and we will likely add to dollar-denominated regional bonds.”

The $59 billion U.S.-incorporated Templeton Global Bond Fund, which mainly buys sovereign debt, lost 5.4 percent in the past three months, leaving it down 0.8 percent in the past year, Bloomberg data show. The fund had 44.7 percent of its money in Asia including Japan as of Aug. 31, according to the company. Average returns totaled 10 percent over the past five years, beating 97 percent of rivals.

Michael Hasenstab, who runs the fund, said in a statement on Sept. 22 that the losses resulted from selloffs in currency markets caused by speculative investors and don’t reflect fundamental problems.

‘Attractive Levels’

This “short period of market volatility typically allows us to build positions at what we regard as attractive levels,” said Hasenstab, who is based in San Mateo, California.

Jim Cielinski, London-based head of fixed income at Threadneedle Asset Management Ltd., which has assets under management of $110 billion globally, said he would take advantage of the decline in bond prices to buy.

“Emerging-market local-currency bonds were actually crowded trades,” Cielinski said in Hong Kong on Sept. 21. “There’s a good reason for that and that’s why I think of this as an opportunity. I’d think we are near the end of this recent downtrend of a lot of these Asian local currencies.”

BNP Paribas’s Ng, who exited Asian local-currency debt at the end of July, said she may wait six months before buying the securities back. Her BNP Paribas L1 Bond Asia ex-Japan fund, which lost 0.2 percent in the past year, now holds cash and Asian dollar notes with relatively high debt ratings, such as sovereign and quasi-sovereign securities of South Korea, Malaysia and Hong Kong.

Room for Gains

“In the near term, the sentiment will continue to be rather negative,” she said. “In the more medium-term view, we still believe Asian currencies have room to appreciate on the basis of the growth differential.”

Mirae Asset Global Investments, South Korea’s biggest mutual fund manager, is increasing cash that it will reinvest in emerging markets when Europe’s debt crisis eases.

“The solutions to overcome Europe’s debt crises may arise by year-end or sometime in November,” said New York-based Heo Joon Hyuk, who manages 1.4 trillion won ($1.2 billion) as head of global fixed income at Mirae Asset. “We expect emerging- market currencies to recover quickly.”

--With assistance from Fion Li in Hong Kong and Jiyeun Lee in Seoul. Editors: Anil Varma, Garfield Reynolds

To contact the reporters on this story: Lilian Karunungan in Singapore at; Kyoungwha Kim in Beijing at

To contact the editor responsible for this story: Sandy Hendry at

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