Diversify with Asian Local Currency Bonds

By Global Thought Leadership
28 October 2019
Putting together a portfolio that does not always move in lockstep can dampen drawdown risks in trying times.

Asian local currency bonds is an asset class that is worth considering for global investors as its correlation with major markets across different regions puts it in a strong position to mitigate overall portfolio volatility.

Over the last ten years when global markets experienced highs and lows, Asian local currency bonds, as represented by the Markit iBoxx Asian Local Bond Index, proved to be a good diversifier as seen in the correlation of returns chart below.

The stoic nature of Asian local currency bonds can be partially attributed to demand for the comparatively higher yield, growing institutional ownership, sound economic fundamentals and longer tenures.

The Bottom Line

Investors, who take any form of risk, can never entirely reduce uncertainty to zero. Hence, the key is to find investments that lend a good degree of lower correlation that improves the risk-return profile. Asian local currency bonds have played that role well over the last decade. 
Correlation with Asia Local Currency Bonds
Source: Legg Mason, Bloomberg, 28 October 2019. Quarterly returns in USD from 25 October 2009 to 25 October 2019. For further information refer to “Definitions” in the following page.
DEFINITIONS
Name Index Index Description
Asian Local Currency Bonds Markit iBoxx Asian Local Bond Index The Markit iBoxx Asian Local Bond Index reflects the performance of a universe of internationally accessible local currency bonds from 11 Asian markets. These include China’s on- and offshore markets, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.
US Small Caps Russell 2000 Index The Russell 2000 Index is comprised of the smallest 2000 companies in representing approximately 8% of the Russell 3000 total market capital is calculated with a base value of 135.00 as of December 31, 1986.
Oil Generic 1st 'CO' Future Price of one month contact for 1000 barrels of export quality Brent blend.
Developed Markets Equity MSCI Developed World Index The MSCI World Index captures large and mid cap representation across 23 Developed Markets (DM) countries*. With 1,650 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Europe Equities STOXX Europe 600 Index The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region.
US High Yield Bonds Liquid High Yield iBoxx USD Liquid High Yield Index measures the USD denominated, sub-investment grade, bond market. The index includes bonds with minimum 1 years to maturity, minimum amount outstanding of USD 400 mil. Bond type includes fixed-coupon, step-up, bonds with sinking medium term notes, callable and putable bonds.
Infrastructure Equities MSCI World Core Infrastructure Index The MSCI World Core Infrastructure Index captures large and mid-cap securities across the 23 Developed Markets countries. The Index is designed to represent the performance of listed companies within the developed markets that are engaged in core industrial infrastructure activities.
US Investment Grade Bonds Liquid Investment Grade iBoxx USD Liquid Investment Grade Index measures the USD denominated, investment grade, corporate bond market. The index includes bonds with minimum 3 years to maturity, minimum amount outstanding of USD 750 mil. Bond type includes fixed-coupon, step-up, bonds with sink funds, medium term notes, callable and putable bonds.
Asian Equities MSCI Asia Pacific ex Japan Index The MSCI AC Asia Pacific ex Japan Index captures large and mid cap representation across 4 of 5 Developed Markets countries* (excluding Japan) and 9 Emerging Markets countries* in the Asia Pacific region. With 1,059 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
US Aggregate Bonds Bloomberg Barclays US Aggregate Bond Index The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond includes Treasuries, government-related and corporate securities, MBS, ABS and CMBS.
Emerging Markets Equity MSCI Emerging Markets Index The MSCI Emerging Markets Index captures large and mid cap representation across 26 Emerging Markets countries. With 1,202 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Gold Generic 1st 'GC' Future Price of one month contact for 100 troy oz of gold.

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