Bloomberg News

Manulife Betting on Australian Debt as South Korea May Rally

October 17, 2012

Manulife Asset Management expects investment-grade debt from Australia and South Korea will drive gains in its Asian bond funds as their central banks cut interest rates to counter slowing economic growth.

“Absolute yield levels in Asia are still offering value in certain markets,” said Endre Pedersen, managing director for Asian fixed income who helps oversee $38 billion of regional assets at Canada’s largest insurer, said in an interview in Singapore yesterday. “We do like high yield but it’s never going to be a major part of what we plan. We are cautious on risk.”

Australia’s 10-year local-currency notes yield 3.23 percent and South Korea’s 3.01 percent, compared with 1.82 percent for similar-maturity U.S. Treasuries and 1.63 percent for German bunds. Indonesian yields of 5.74 percent are also attractive because inflation will slow, Pedersen said.

Manulife’s Asia Total Return Bond (MASTRID) fund has gained 11.3 percent in 2012, beating 87 percent of its peers, according to data compiled by Bloomberg. Local-currency bonds in South Korea and Indonesia are two of Asia’s best three performers this year, according to indexes compiled by HSBC Holdings Plc. Australia and South Korea cut interest rates in October for the first time in at least three months.

‘Aussie’ Headwinds

Bonds from Australia, rated the highest investment grade by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, returned 6.1 percent this year, headed for a third annual gain, a Bank of America Merrill Lynch index shows. The central bank’s benchmark rate is still the highest among major developed economies even after policy makers cut borrowing costs by 1.5 percentage points to 3.25 percent over the past 12 months.

Pedersen, 38, said the odds of a pickup in the Australian dollar also make the nation’s debt attractive. The so-called Aussie has dropped 0.3 percent against its U.S. counterpart over the past month. The Aussie traded at $1.0396 at 2:34 p.m. in Sydney and reached 95.82 U.S. cents on June 1, the weakest level since Oct. 5, 2011.

“When you are expecting a slowdown, Australian rates look decent now,” said Pedersen. “We can see more headwinds on the currency,” yet support will come from central banks seeking to diversify assets, he said.

Korea Rate Cut

Indonesia’s local-currency bonds returned 8.3 percent this year, beating the 8.1 percent gain on Indian debt, according to HSBC Holdings Plc indexes. South Korean notes rose 6.6 percent. Indonesia is rated the lowest investment grade of Baa3 by Moody’s, compared with the fourth-highest of Aa3 for South Korea.

Pedersen forecast at least one more rate cut for South Korea after the central bank lowered its seven-day repurchase rate for the second time this year to 2.75 percent on Oct. 11. A 29 percent decline in the won versus the yen in the past four years will help support exports and boost demand for the currency, he said in a Sept. 10 interview.

“Korea stands out from the rate side and the currency is both absolutely and relatively cheap,” he said. “In Korea, we are looking for further rate cuts.”

Indonesia regained investment-grade rankings from Fitch in December, followed by Moody’s in January, while S&P still rates it at the highest junk level. Average yields on the nation’s debt of 6.2 percent compare with 5.2 percent in the Philippines, 3.5 percent in Malaysia and 3.4 percent in Thailand, the HSBC indexes show.

‘Benign’ Inflation

Pedersen said he is betting more on the interest rate and inflation angle in Indonesia than the rupiah, which has lost 5.7 percent this year, the biggest drop in the region.

Consumer-price gains slowed for the first time in four months in September, supporting the central bank’s decision to hold off on increasing borrowing costs. Inflation was 4.31 percent from 4.58 percent in August. Bank Indonesia kept its reference rate at a record-low 5.75 percent on Oct. 11.

“It’s hard to take a view on the currency but on the rate side, we’re starting to see this very benign inflation outlook,” Pedersen said. “We can’t afford to be underweight this market because this is part of benchmark indices. If you want exposure to Southeast Asia, you’ll be losing out.”

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

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


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