Chinese Bonds – most compelling fixed income investment in the world?

According to Jan Dehn the Head of Research for Ashmore Group, the most compelling fixed income investment in the world right now are Chinese Bonds. For two reasons I was really taken by an interview he gave in Monday’s AFR with Patrick Commins Firstly, Ashmore are an exceptional Emerging Markets Asset Manager and they have been now for nearly 20 years. Secondly, the whole idea that China which always is reported in the media as the country with slowing growth and serious concerns around their residential and commercial property markets, not to mention the social, political and environmental issues. I was really interested to hear more from Dehn on this idea.

Mark Coombs Ashmore CEO

Mark Coombs Ashmore CEO

Now I am quite partial to Ashmore, and I have followed closely the Asset Manager and in particular Mark Coombs their CEO. I joined ANZ in the mid 1990’s and at that time Mark ran ANZ Investment Bank from London, effectively my boss. He and his team had carved one of the premier EM businesses in the world. However with the Russian Crisis in the late 1990’s which happened to coincide with the appointment of a new ANZ CEO John McFarlane. The EM assets that the ANZ EM desk had accumulated were under severe pressure, McFarlane told him to close the business, questioning why an Australian Bank should be involved in trading Russian debt.

So Mark and his team, purchased the whole EM portfolio from ANZ at fire sale prices, all properly MTM. The rest was history for Ashmore, the market rallied, ANZ sold out at the bottom of the market and Ashmore and Mark Coombs have continued as one of the best EM Asset Managers. According to Forbes magazine Mark’s wealth is now close to Us$1.9bn one of the richest people in the UK. So when Ashmore talk I always try to find out where they are placing their money.

According to Dehn, Australian Superannuation Funds hold next to no assets in Emerging Markets Fixed Income. In contrast to the US which holds between 3-5%, or countries in Europe who can hold as much as 10-20%! A common refrain from me, is how underwhelming our domestic funds can be, the gate-keepers of our Superannuation.

Investing in Chinese local currency bonds are something very appealing for Dehn, his reasoning is that the local bond market is only just being opened to foreign investors and it currently is about A$5 trillion in size. Now Global Fund Managers over the next few years will need to participate in the market and their allocations are likely to move from 0% to about 2%.

Dehn and Ashmore, feel that inflation will re-emerge over the next 18 months, the US is unlikely to raise rates for sometime. Lower real rates will weigh on the US$, while the largest holder of US$ bonds is the Chinese Central Bank. If the Central Bank does look to sell US assets like Treasuries, this will put even more pressure on the US$ and according to Dehn the renminbi could double over the next 10yrs. Imports into China will increase and deflation is likely, growth will slow. Ensuring that rates are likely to head lower for Chinese yields.

Unlike the Russian EM crisis I watched ANZ and Ashmore deal with, Dehn feels that now there are buyers of the last resort. That is, if we were to have a major financial crisis, unlike in the late 1990’s, we now have large Global Wealth Funds and Asset Managers that can step in and support the Global Bond Market including China. Maybe while we all continue to talk about a looming crisis, this ensures that it remains further away than we realise.




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