Asian debt is a mainstream asset class and not just a subsection of the global bond universe, said Legg Mason Western Asset manager of the Asian opportunities fund Chia-Liang Lian.

He believes that, despite Asian debt having gradually established itself as an asset class in recent years, investors are still not assessing the region’s paper accordingly.

“We no longer view Asian debt as a peripheral part of the emerging market universe that merely acts as a supplement to global bond exposure, as was the case 20 years ago,” he said.

“Instead, we believe that Asian debt is now asserting itself as a mainstream asset class for international and regional investors alike. Investors should take a step back and consider the longer-term attributes of Asian debt as an asset class.”

The relevance of indices for strategic allocation therefore needs to be reconsidered, as global bond indices traditionally are heavily weighted towards developed markets. While this was once consistent with each region’s respective share of the global economy, the shift away from the G7 in recent years still needs to be reflected in many benchmarks, Lian said.

“In the three decades prior to 2000, the pattern of the world economy was very stable, with separate episodes of economic stress exerting only temporary and minor knock-on effects on the G7 economies,” he explained.

“However, in the last 10 years, there has been a striking change in trend and, if you look at the respective positions in terms of share of world GDP, the G7 has declined from roughly two-thirds to about half. Yet the weights assigned to emerging Asia in global benchmarks including Citibank’s WSPI are currently less than 3%, which shows a clear disconnect between the economic reality and the benchmark weightings.”

Moreover, there has been a significant build-up in external surpluses across the continent, as Asian economies have outpaced developed countries by about six per cent on average over the past decade.

“These surpluses have meant many Asian countries are now key exporters of capital to the rest of the world, with the resulting accumulation of reserves acting as a form of self-insurance in periods of exogenous pressure,” Lian said. “It is no surprise that compared to earlier years, the recent market volatility in Asian currencies has declined noticeably, precisely because policymakers are now more adequately equipped to minimise unintended currency fluctuations due to external forces.”

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