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Vontobel Ramps Up India Bond Holdings as Global Investors Eye Return-rich Opportunities


Michael Chen

March 28, 2024 - 10:55 am


Vontobel Amplifies Investments in India’s Local Bonds Amid Global Interest

(Bloomberg) -- As international investors show increasing interest in Indian assets, Vontobel Asset Management is actively bolstering its portfolio with India's local-currency bonds, highlighting the appealing valuations and a highly anticipated inclusion in key global bond indices.

Vontobel's Strategic Positioning in the Indian Market

Thierry Larose, the Zurich-based fund manager at Vontobel Asset Management, has put forth an assertive stance on the value presented by India’s debt market. Managing a whopping $230 billion across various funds, including the Sustainable Emerging-Market Local-Currency Bond Fund and Emerging-Markets Blend Fund, Larose's investment decisions carry considerable weight. These funds have demonstrated remarkable performance, surpassing 90% of their peers in the previous year, as per Bloomberg’s data collection.

The prevailing sentiment among Wall Street’s investment powerhouse is one of strong optimism, driven by India's swift economic growth trajectory and a distinctive low correlation with other global and emerging markets. In an extraordinary revelation, it emerges that international investors account for a mere 2% of India's government bonds – a remarkably low figure in comparison to its emerging market counterparts.

India: The New Frontier for Bond Investors

India's impressive trillion-dollar sovereign bond market is poised for an influx of international capital. This surge is expected to coincide with its inclusion in the JPMorgan Chase & Co.’s emerging-market bond indexes coming this June. The bonds, specifically the two-year varieties, offer a 7.1% yield, a notably favorable figure when viewed against the backdrop of a gradually declining inflation rate, projected to fall to 4.5% by 2025 from the prior year’s 5.7%. Furthermore, the rupee boasts exceptional stability with minimal historical volatility, second only to the Hong Kong dollar among 31 major currencies.

"We find India an eminently attractive market, unbeatable from a valuation viewpoint," Larose remarked during an interview. He emphasized the robustness of the Indian currency, coupled with interest rates that soar above the anticipated inflation rate, creating an irresistible proposition for their investment strategy.

This contrasts starkly with India’s equity valuations, which rank among the world's priciest. For example, while the S&P BSE Sensex's earnings yield is a modest 4.9%, it is dwarfed by the yield on the benchmark 10-year bond at 7.1%. This discrepancy suggests that equities do not furnish investors with adequate compensation for the higher risk undertaken, as opposed to bonds. Such exuberant gains in equities have prompted caution from several investment banks, including Citigroup Inc. and Societe Generale, not to mention scrutiny from domestic market regulators.

India's Bonds Lead in Emerging Market Returns

Among the investment-grade league of emerging markets, India's local bonds triumph as the year's top performers. The average yield surges past 7%, ranking third highest among its peers, as per a Bloomberg index focusing on emerging-market debt. HSBC Asset Management projects that Indian bonds can potentially draw an astronomical $100 billion from foreign investors in the years following their JPMorgan index inclusion.

The investment world is abuzz with anticipation, but Larose points out a bottleneck: the protracted process of setting up a local account has prevented a significant infusion of capital into the Indian bond market. Yet, Larose remains optimistic, envisaging that the gradual progression will inevitably lead to substantial investment flow.

Concurrently, the broader market of emerging-market local bonds has found the year’s performance lackluster, battling headwinds amid the persisting uncertainties of US interest-rate adjustments and devaluation across virtually all emerging-market currencies, with the notable exception of the Mexican peso. This uncertainty has prompted a strategy of caution for Larose, who advocates for diversified investments to mitigate the risk of misjudging the market.

Vontobel’s Emerging Market Diversification Strategy

Vontobel isn’t putting all its eggs in one basket. The asset manager has augmented its investment in South Africa’s local bonds while scaling back its Brazilian holdings. Larose’s concerns about Brazil stem from apprehensions about government interference in central bank policymaking and the governance of state-controlled enterprises.

Turkey is yet another market under Vontobel's lens, despite its disappointing performance. Turkish local bonds slumped nearly 9% despite the central bank’s aggressive rate hikes amounting to 30 percentage points since June. "Turkey has let us down this year because it seemed poised for a significant economic recovery," Larose added. Nevertheless, persistently high inflation and underperformance of local bonds have warranted a more conservative, wait-and-see approach for the Turkish market.

Looking Forward: Vontobel's Adaptation and Sector Watch

With assistance from Srinivasan Sivabalan, this news piece reflects the ever-dynamic financial landscapes and how top asset management firms like Vontobel navigate these waters. Investors eagerly eye the Indian market, with firms like Vontobel acting as a bellwether for how deep the shift towards emerging market bonds will run.

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In conclusion, as global investors widen their horizons, India's local-currency bonds emerge as a lucrative frontier, offering a compelling amalgamation of value, stability, and prospective yield advantages in the midst of a changing global economic landscape. As Vontobel Asset Management increases its foothold, it will serve as a critical indicator of the investment community's confidence in India's potential, setting a precedent for the influx of international funds anticipated to reshape the market in the coming years.