APAC investors to increase bond allocations amidst growing optimism

They plan to allocate 28% to Asia excluding Japan in the next 12 months.

Asia Pacific (APAC) investors are increasingly optimistic about economic prospects, with many planning to boost their exposure to APAC bonds, ABF Pan Asia Bond Index Fund’s survey revealed.

The survey, which polled 600 asset managers, owners, family offices, and private and commercial banks across APAC, found that investors plan to allocate nearly 46% of their assets to fixed income over the next 12 months, up from 37% a year ago.

Moreover, APAC investors plan to allocate 28% of their fixed income investments to Asia excluding Japan in the next 12 months, up from 26% a year ago. Tokyo remains the second most important destination for fixed income allocations, holding steady at 16%, whilst only 14% and 13% of investors' assets are invested in North American and European fixed income, respectively.
 
Nearly four in 10 (36%) investors expect Asia excluding Japan to perform best in 2024, followed by 15% for Japan, 14% for North America, and 9% for Europe.

"With inflation gradually coming under control, there is a widespread expectation of global interest rate cuts, which bodes well for the continued outperformance of many Asian bond markets. Investors are feeling more optimistic about the region compared to more mature markets," said Kheng Siang Ng, Asia Pacific head of fixed income and head of Singapore at State Street Global Advisors.    
 
Ng noted that APAC markets are becoming more investor-friendly, with countries liberalising their capital markets and expanding their bond investor base through regulatory reforms. 

For instance, China's onshore bond market is opening up with support from Hong Kong as an international financial gateway, through initiatives like Bond Connect and Swap Connect, which improve access and hedging efficiency for global investors.
 
The survey also revealed that 41% of APAC investors are investing in bonds to generate income, 31% focus on diversification, and 30% are motivated by sustainability-related goals. 

Investors strongly prefer short to medium-term bond maturities, with 64% favouring maturities up to 10 years, and 46% targeting the 6-to-10-year range. Only 7% prefer holding maturities over 15 years.
 
Despite the optimism, some investors remain concerned about recession and inflation (37% each), followed by geopolitics and currency depreciation (35% each).

Ng also said that borrowers are increasingly shifting funding from US dollars to domestic markets, and ageing wealthy societies like Japan, South Korea, and Hong Kong are showing a preference for the safety of fixed income investments over equities, further bolstering APAC’s bond markets.