For many years the investment rule of thumb was that equities offered growth and bonds tried to protect capital while deriving an income from that capital.
Has that traditional view now reversed? Some evidence suggests it might have.
We live in a world where more than $11trn (£8.9trn) of mostly sovereign debt is paying a negative interest rate and where a leading equity index, in this case the FTSE 100, has offered little growth over the past five years while paying a dividend yield of 3.97 per cent.
One part of the world that can offer the prospect of attractive levels of income, above the cash interest rate – or Libor – is Asian fixed income. Here, a well-chosen basket of sovereign and credit bonds with currency and rate positions can offer an alternative to some of the challenges of low yields.
From a macro perspective, two trends support this proposal. Both are focused on China – by far the most important influence on the region. The first is that slowing Chinese economic growth is affecting the immediate hinterland – but not the economies further to the south.
In the north, this hinterland is dominated by Japan and South Korea – economies that trade with the outside world and slow when more dominant economies, such as China, also slow. For example, South Korean manufacturing is grappling with the effects of weaker export markets.
South Korea offers asset allocators and stock selectors meagre pickings. In a world of flat yield curves it has one of the flattest: at the time of writing, its three-month sovereign bond paid a yield of 1.3 per cent, while its 30-year bond paid 1.5 per cent. If oil prices rise then the inflation that follows will likely lift yield curves at the long end and, therefore, offer more opportunities to investors; but, for now, South Korea probably only interests those able to take short positions.
The southern story is different. Here the countries that make up the Asean bloc of nations each tend to have a more domestic focus. That relative insularity can shield them from Chinese slowing.
Indonesia is a good example. Its government was elected in 2014 on a reformist ticket and is making good on that promise. One area of focus is infrastructure spending – something that can benefit all the things that fixed income investors like: sovereign creditworthiness, currency performance, performance of existing credits and new bond issuance – and the country is already building new ports and transport links.
It is fair to say that the most attractive investment opportunities tend to be in the south of the region, and also India.
However, the second trend places this in context: China might be slowing but only the shortsighted would discount it. China’s growth slipped to 6.7 per cent in the second quarter but that places it well ahead of the US, still the world’s largest economy with recent growth of 1.4 per cent. More important than these percentages are the absolute numbers: nominal Chinese GDP now sits at a staggering $10.8trn – more than Japan, Germany and the UK combined.
