Indonesian bonds appear more promising than India’s in a contest between Asia’s high-yield heavyweights, according to two of the world’s biggest investment funds.
The archipelago’s debt is more attractive due to a superior fiscal outlook and the greater potential for currency strength, says JPMorgan Asset Management, which oversaw $1.9tn globally at the end of March. Indonesia’s bonds also have more upside than India’s after suffering more heavily in the virus sell-off, according to BNP Paribas Asset Management.
“We favour Indonesian debt since we reckon that fiscal challenges are less severe there,” said Julio Callegari, lead fund manager for Asia local rates and currencies at JPMorgan Asset in Hong Kong. “We hold a small position in India debt that we don’t intend to increase. In Indonesia we hold a larger position and our bias is to increase it.”
The debate among investors over the relative merits of Indonesian and Indian bonds illustrates the shift in markets that has taken place in recent weeks. Risk assets largely rallied across the board in April and May as sentiment rebounded from coronavirus sell-off. That period has now given way to one of greater caution where buyers are more discerning about where they put their money.
One of those places is Indonesia. The nation’s local bonds have returned 22% this quarter in dollar terms, reversing the 17% decline from January to March, according to Bloomberg Barclays indexes. Indian securities have gained just 3.3% in the current quarter, following a 1.4% loss in the prior three months. Indonesia’s rupiah has rallied almost 15% since the start of April, while India’s rupee has lost 0.4%.
JPMorgan Asset already had an existing bias in favour of Indonesian bonds over Indian debt, and this was reinforced by the impact of the virus pandemic, Callegari said.
“The recession in India is likely to be deeper than in Indonesia and the fiscal deterioration larger,” he said. “Given India’s already larger debt and fiscal deficit and lower credit ratings, this contributes to our relative preference for Indonesian debt.”
Some investors still see value in both Indian and Indonesian bonds.
India’s high foreign-exchange reserves bode well for its bonds during times of risk aversion, while its efforts to gain inclusion in JPMorgan Chase & Co’s global indexes will attract more investors, according to Emso Asset Management, a $5.5bn asset management firm focused on emerging markets fixed income. “Indonesia has strong risk-on properties, whilst India has strong risk-off buffers,” said Shikeb Farooqui, a senior economist and macro strategist at Emso Asset in London. “It is encouraging that India is looking to diversify its investor base with JPMorgan index inclusion.”
At the start of the pandemic crisis, Indonesian bonds fell further than India’s amid concern the Southeast Asian nation would be more vulnerable due to its reliance on foreign flows. With the Federal Reserve and other global central banks providing extraordinary support, the crisis has eased and the trend is now turning in favor of Indonesia.