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Morgan Stanley (MS): Cherry Picks Asian Bonds

Morgan Stanley finds the Asian bond market lucrative again after market rout

Morgan Stanley (NYSE:MS) Investment Management has updated its list of some valuable bonds where it has supported the bond market in India, Philippines, and Indonesia. In an interview with Bloomberg, Liangtin Tu, a Business journalist said that Morgan Stanley’s move has come as it looks to take advantage of January collapse and increase holdings in emerging markets through weakened prices. Meanwhile, the investment firm has cut its exposure in China and downgraded its rating from Overweight to Neutral.

Developing markets in Asia are getting a substantial return on inflows after a selloff in January as yuan slumped, declining commodity prices, and almost $6 trillion of stocks got sold off. Several major banks started to pull out their operations from Asia as the future prospect looked bleak. Nevertheless, yuan started to stabilize and commodity prices saw a rebound.

After the market rout, Indonesian sovereign debt saw inflow as net buying for April increased to $1.3 billion. Whereas the Indian bonds experienced an inflow of $453 million. Analysts suggest that Asian bond markets have benefitted from the delay in Federal Reserves’ rate hike, stabilizing of China’s economy, and rebound in commodity prices. Emerging market debt portfolio manager Warren Mar states that Morgan Stanley finds telecommunication and blue chip companies in India, along with developers and utilities in Philippines and Indonesia.

Mike Kushma, who handled $406 billion of assets as a CIO of Global Fixed Income in an interview with Bloomberg stated: “We have been rotating to emerging markets in the first quarter, first from a valuation perspective as things just got so beaten up.”

The inflows in the bond market of emerging markets especially in Asia came in wake of strong offshore demand in March. Since then, Malaysian bonds have attracted lots of investors in almost two years. However, Indonesia offers one of the highest yields in Asia at the moment as it has attracted several investors to its bond market. According to the Indonesian government data, its bond holdings have been increased by almost half a million dollars in first two weeks of April. Whereas in March, the holdings increased to almost $1.4 billion. Some investors suggest that Indonesian bonds provide higher yield with additional risks than the Malaysian bonds.

On the other hand, Morgan Stanley has been cutting its exposure in China. Recently, The defaults of onshore companies have been on the rise as the demand has been poor. There has been rich valuation of property value in the offshore markets which has disturbed the investors. Morgan Stanley suggests that investors would prefer state-owned enterprise (SOE) that has less default risk. In private equities, Morgan Stanley prefers blue-chip companies with low yield bonds as for now it’s all about risk aversion in China.

Another important theme for Morgan Stanley when it comes to cherry picking investment is improvement in governance of assets. Recently, Indonesian government implemented a set of policies for better growth in the economy that allows central banks to implement easing monetary policies. There are drawbacks in Indian bond markets as well, as it has weak infrastructure which has been identified by Indian Prime Minister Narendra Modi as a fixation in the system.