My final formal meeting in Singapore was with a team from iShares BlackRock at their impressive offices in the financial district. Given Lunt Capital’s extensive use of ETFs in our strategies and the significant role iShares plays in the world of ETFs, I was eager to visit with them.
My meeting in Singapore was coordinated by iShares’ Doug Frey on the U.S. side of the Pacific. Our relationship with Doug is relatively new, but he embraced the objectives of our Investment Trek and he’s been a strong supporter ever since. Thanks again, Doug.
I met with Vish Acharya and Corwin Huang who both work in the Fixed Income group at BlackRock. I will go into greater detail about the meeting in the paragraphs that follow, but if had to summarize my meeting with BlackRock in just one word, that word would be “impressive.” Vish and Corwin were incredibly articulate, well organized, and eager to share their knowledge of the unique environment in Singapore and Southeast Asia. We could have continued our conversation for another few hours, but as the last meeting of the day, I was again playing the role of being the only thing standing between them and wrapping up their work day. I wish to offer my sincere thanks to Vish and Corwin for their time and the information they shared with me.
We started the conversation with the question of, “Why should investors be in a particular market such as Asia?” In the U.S., growth in the fixed income space comes through spreads or rates. In Asia, investors can benefit from these same two factors… but there’s a third factor – currency. This currency exposure allows investors to take advantage of macro drivers that are impacting markets at a country level. Vish noted that the credit markets in Asia have seen a massive boom in growth. Credit ratings are improving in Asia and a generation of wealth creation and the related consumption wave is happening now.
Vish commented that there is a lot of good policy currently coming out of Asia. China and India have solid leadership who are sending most of the correct signals to the global community. Rating upgrades are happening as a result. Fixed income markets are maturing in Asia as transparency, diversification, and liquidity improves.
The additional factor… let’s call it ‘FX factor’ (rather than just the ‘X factor’)… creates some unique opportunities for investors in Asia. While currency swings are difficult to predict in the short-term, Vish noted that Asia is growing because of demographics and those demographics are very significant. Domestic demand continues to grow for local currency bonds while the prevalence of US dollar denominated bonds is shrinking. South Korea, for example, has a huge market for local currency bonds.
One cannot have a conversation about the fixed income markets without mentioning the Fed and this meeting was no different. Vish noted that the Fed still “rules everything,” which reaffirms our stance that central banks rule the world.
We played a quick game of “when will the Fed raise rates,” and they noted the consensus view in their group (and many others) seems to be September with a few splinter cells of those who fall into the December camp. Regardless of the timing, however, is the view that much of the expected change is already priced in to the market. They suggested we may see a slight shock to the system but they expect Asian spreads to remain relatively stable.
The discussion continued to why fixed income, and particularly Asian fixed income, has a promising outlook. As Vish exclaimed, “The world is aging, and as the world gets older, the world needs income.” Among the really large countries in Asia, the average age is relatively low, but the older population is growing rapidly. This demographic wave is driving some compelling opportunities in the fixed income space.
And then we arrived at the critical question Vish and Corwin had been setting up all along – “Where do we find the income?” Considering these particular demographic, geo-political, and regional characteristics, where are Asian investors to look for sufficient income?
Accommodative monetary policies by central banks around the globe create some real challenges when searching for yield. Investors are looking for opportunities in high yield, emerging markets, and Asia to find yields north of 4%. Additional factors they’re watching closely include inflation, oil prices, and real rates. Inflation should remain essentially irrelevant over the short- to mid-term. Oil is heavily subsidized in many Asian nations. Real rates in Asia are higher than expected… which should act as a significant buffer for when rate changes eventually come.
The U.S. is seen as a global growth engine, but 2.8-3.0% growth is modest. Europe is flat. Asian growth rates have historically been quite sluggish. Economies are asynchronous. Asian central banks can start to cut rates which will spur additional growth and bring economies more in to sync with other regions. BlackRock expects continued rate cuts in Asia. With growth north of 6%, Asian markets really aren’t that sluggish on a relative basis.
Why is it that some countries have good policies while others do not? As the expression goes, “We don’t get the government we want… we get the government we deserve.” Structure matters. Example – Indonesia One Stop Shop – trying to start a business is absolutely daunting because of the dozens of agencies one must work with to do so. Indonesia has introduced a one stop shop where they’ll interface on your behalf. China has embarked on a massive anti-corruption campaign. As corruption levels move lower, so too does the cost of doing business. Corruption isn’t cheap, despite the perception of getting a deal or somehow beating the system. Modi is taking India in the right direction by investing in infrastructure and pushing hard to curb corruption. In general, Asia is moving in the right direction in terms of reforms. Asian default rates are quite low, in part because lending standards are higher as well as the societal norms which come into play.
Asian credit seems to be in the sweet spot. They’re risky enough to offer some yield but not so risky that threat of default or significant shocks is ever-looming. When you’re in the sweet spot, the capital flows… and funds are flowing strongly into Asia. Investors are getting more concerned about the Fed and they’re looking for new homes for their capital.
As I noted at the beginning of this post, I was highly impressed with Vish and Corwin and I’m confident the meeting could have continued for another few hours. The juxtaposition between how MAS sees the fixed income markets in Singapore and how BlackRock navigates the waters of Asian fixed income was fascinating. One’s perspective makes all the difference… a recurring theme during our trek and an important reason we’re making the effort to meet with so many investment teams, central banks, exchanges, and others who have those unique and important perspectives.
Special thanks to Brennan Staheli, Joshua Cooper, and the Lunt Capital team for their contributions to this report.