Legg Mason’s Chia-Liang Lian, manager of the £737m Legg Mason Western Asset Asian Opportunities fund, says that the credit ratings of Asian and emerging economies are improving while those of high quality sovereigns in the western world are coming under threat.
"We no longer view Asian debt as a peripheral part of the emerging market universe that merely acts as a supplement to global bond exposure, as was the case 20 years ago," he said.
"Instead we believe that Asian debt is now asserting itself as a mainstream asset class for international and regional investors alike. Investors should take a step back and consider the longer-term attributes of Asian debt as an asset class."
"A decade ago, just three of the 10 largest Asian economies were rated A or above by Standard & Poor’s," the manager added.
"Today this ratio has doubled to six, with Hong Kong and Singapore rated AAA. Meanwhile in western Europe, where countries were uniformly rated A or higher 10 years ago, ratings are now distinctively more mixed and even the best-quality sovereigns are now vulnerable to downgrades, as we’ve seen in the last couple of weeks."
Earlier this week, ratings agency Moody’s revised the credit worthiness of nine European economies. In the report it said that AAA-rated Austria, France and the UK now had a 30 per cent chance of being downgraded in the next 18 months.
Lian says that the slowdown in the West and the relative strength of leading Asian markets means the improvement in the credit worthiness of Asian economies will gather pace.
Data from FE Analytics shows that so far in 2012 the FTSE All Emerging index has returned 14.7 per cent while the FTSE All World Developed index has returned 8.1 per cent.
Performance of indices in 2012
Source: FE Analytics
Advisers are recommending that their clients allocate more cash to the asset class.
"This is a corner of the market that you really can’t ignore," said Kerry Nelson, managing director of Nexus IFA. "This type of investment is really gathering momentum now and many of the funds now have three-year track records."
Nelson believes that investors interested in gaining access to the Asian and emerging market debt story should think about the £77m M&G International Sovereign Bond fund and the Templeton Emerging Markets Bond fund.
According to data from FE Analytics Mike Riddell’s M&G International Sovereign bond fund has returned 92.41 per cent over the last decade while the average Global Bond fund has returned 73.11 per cent.
Performance of fund vs sector over 10 years
Source: FE Analytics
"M&G has an exceptional track record in the fixed income space and Templeton is renowned for its emerging markets funds. With this type of investment you need to choose fund houses that have a proven research team in Asia and emerging markets," Nelson finished.