Global investors are recognizing India’s outperformance in an otherwise depressed bond market in Asia. From J.P Morgan’s decision to include Indian local currency sovereign bonds into its Government Bond Index-Emerging Markets (GBI-EM), to UOB Asset Management launching an India-focused bond fund - Indian corporates are issuing more bonds to tap into the global financial markets.
Over the past three years, India's weighting in JACI has consistently hovered between 6% and 7%, while the average India allocation for funds within Morningstar's Asian bond category has climbed from 8% in 2021 to 10% in December 2023. Similarly, within Morningstar's Asian high-yield bond category, the average India weighting surged from 13% to 17% over the same period as per Morningstar Manager Research’s special report.
According to Arvind Subramanian, Senior Analyst, Manager Research, Asian fixed-income investors have taken notice of India's improving macroeconomic outlook in recent years, as strong economic fundamentals, such as robust growth and stable inflation, have instilled confidence in the country's bond market. Despite India's relatively stable weighting in key benchmark indices, allocation by Asian fixed-income funds has significantly increased, highlighting the favorable sentiment among fund managers toward the country. This shift contrasts sharply with India's historically smaller presence in the Asian fixed-income market, mainly due to the limited supply of dollar-denominated bonds from the country.
Exhibit 2: The allocation to India by Asian fixed-income funds has increased markedly in recent years even as India's weighting in prominent benchmark indexes has remained relatively stable, underscoring the favorable sentiment among fund managers toward the country.
Below are the Key takeaways of the Report:
- The investing landscape within the Asian high-yield market has evolved in recent years. While China originally dominated the market, a recent string of defaults in its real estate sector and increasing pressure on its credit market have lowered its appeal. Conversely, markets such as India, Macau, Hong Kong, and the Philippines have gained in prominence, resulting in a significantly more balanced universe.
- Many of Asian high-yield funds had expanded their investments to include lower-rated high-yield bonds from India, utilizing the flexibility in their investment strategies to venture beyond their core mandates. Funds such as DWS Invest Asian and the LO Funds Asia Value Bond have stood out in this category with respectively 21% and 17% of their portfolios in Indian bonds as of February 2024, respectively.
- Despite the favorable backdrop, some Indian corporates have faced credit challenges, highlighting the risks associated with the market.
- Several funds within Morningstar’s local-currency Asia Bond Category have already begun positioning their portfolios to reflect the developments that are poised to enhance inflows into Indian sovereign bonds, potentially providing a tailwind for bond performance.
The full report is available here.
