High inflation looks likely to linger for months or even years. To preserve their purchasing power, Asian investors are turning to investment grade bond funds.
As we enter an endemic phase of Covid-19, and with most lockdown measures now lifted, the world had been looking forward to a global economic recovery. Instead, developed economies, starting with the US and Europe, are seeing record high inflation.
Closer to home, many of us in Asia have also started to feel the pinch. In Singapore for example, inflation has surged to its highest level in 14 years1. As a result, most Asians are now forced to fork out more for everyday expenses, ranging from groceries to petrol.
5 reasons why high inflation is a problem
#1: An increase in the inflation rate is a decrease in your purchasing power. The higher the inflation rate, the more money you need to pay for the same product or service.
#2: Central banks tend to raise interest rates to try to stem inflation. However, this tends to slow economic growth, which in turn can result in company closures and job losses.
#3: Inflation also raises the cost of government services. To pay for this, governments are often forced to hike income tax and/or Goods and Services Tax (GST). This further depletes consumers’ purchasing power.
#4: The US dollar has gained strength relative to many Asian currencies. This means that imports priced in USD are becoming more expensive, which puts more upward pressure on prices.
#5: Asian economies generally enjoy good capital inflows. But a strong US dollar and high global bond yields can cause capital to flow out instead, further weakening the economy.
Cash loses its value over time
If your money is not earning a return, high inflation will erode the value of your monthly income and savings. Of course, it is useful to hold some cash as a buffer against unexpected events. Experts usually advice individuals to hold six months’ worth of their monthly income or expenses in cash.
But cash depreciates in value over time. Even assuming a relatively low and stable inflation rate of 2 percent (this is the target for most developed country central banks), over 20 years, your $100,000 cash savings will be worth just $67,000.
Figure 1: Erosion effect of 2% inflation on cash savings
Source: UOBAM. Calculation assumes that 0% interest on cash savings
Fixed deposits: Are they good enough?
Fixed deposits (FDs) in Asia have become more popular in recent months given the rise in banks’ interest rates off their multi-year lows. However, in many cases, inflation rates are rising faster than FD rates. As a result, there can be a significant shortfall in FD rates compared to prevailing inflation rates we are facing today.
Figure 2: Inflation vs fixed deposit rates across select ASEAN countries, Sept/Oct 2022
|2022 Forecast Inflation Rate2 (%)||5.5||2.7||4.6||6.3|
|12-month Fixed Deposit Rate (%)||2.83||2.74||4.75||1.06|
Source: See footnotes. Notes: Rates based on average of the Top 4 highest rates for 12-month local currency fixed deposits.
How to bridge the gap
Short duration, investment grade bond fund investments are relatively lower in risk and are currently offering attractive yields. While bond prices have come under pressure this year due to the rise in interest rates, we expect this to ease in coming months, and could even rise in the event of a recession. They are therefore an option for those seeking to hedge against rising prices in today’s high inflation and low growth environment.
Here are two UOBAM solutions to consider:
This fund seeks to provide stable income and capital appreciation by investing in debt securities and money market instruments issued by Asian corporations, financial institutions, governments and their agencies. The Fund has also previously won the best-in-class for the Top Fund Award in the Asia Bond Category, for the Benchmark Fund of the Year Awards in 20167.
This fund has an effective duration of about 1.4 years (as of 31 August 2022), and invests in high grade, short-term debt securities. The fund mainly focuses on investments in Asia given the opportunities in the region and its objective is to achieve a yield enhancement over Singapore dollar deposits. It also utilises a laddered investment strategy to enhance overall returns in an environment of rising interest rates.
Fund Comparison as of 31 August 20228
|United Asian Bond Fund||United SGD Fund|
|Weighted average yield to maturity (in SGD terms)||4.51%||4.43%|
|Effective duration||5.45 years||1.41 years|
|Number of Issues||66||90|
|Country allocation||China – 31.32%||China – 31.32%|
|Hong Kong – 14.20%||Singapore – 14.78%|
|USA – 11.43%||Hong Kong – 11.71%|
|South Korea – 10.70%||Indonesia – 7.81%|
|Indonesia – 9.42%||Japan – 7.39%|
|Singapore – 7.75%||India – 6.90%|
|Malaysia – 3.10%||South Korea – 6.88%|
|India – 2.67%||Thailand – 5.55%|
|Others – 6.53%||Others – 14.85%|
|Cash – 2.88%||Cash (negative) – -0.51%|
|Top sector allocation||Financials – 33.87%||Financials – 36.33%|
|Government – 19.94%||Industrials – 16.35%|
|Industrials – 11.19%||Utilities – 12.17|
|Information Technology – 7.44%||Consumer Discretionary – 9.55%|
|Consumer Discretionary – 6.53%||Materials – 9.03%|
|Top 5 holdings||Temasek Financial I Ltd Company – 5.99%||SSG Resources Ltd – 2.52%|
|Republic of Korea – 5.88%||Mizuho Financial Group Cayman 3 – 2.34%|
|US Treasury N/B – 5.24%||Sumitomo Mitsui Financial – 2.17%|
|Perusahaan Penerbit SBSN – 3.57%||Bank Rakyat Indonesia – 2.06%|
|Perusahaan Gas Negara – 1.81%||Minor International PCL Bank Guarantee – 1.97%|
|Benchmark Index||April 2000 – July 2003: JP Morgan Emerging Markets Bond Index Global Constrained Asia
August 2003 – December 2006: JP Morgan Asia Bond Total Return Composite
January 2007 – 3 April 2022: JP Morgan Asia Credit Index Total Return Composite
4 April 2022 – Present: JP Morgan Asia Credit Index Investment Grade Total Return
|Since Inception – 2 May 2021: 6-month SIBID
3 May 2021 - 7 April 2022: 12M Bank Deposit Rate
8 April – Present: 6M Compounded SORA
|Inception date||Class SGD: 5 April 2000
Class A SGD Dist (Hedged): 5 December 2017
Class A SGD Acc (Hedged): 31 January 2018
Class USD: 12 April 2013
|Class A (Acc) SGD: 19 June 1998
Class A (Dist) SGD: 13 March 2014
Class A (Acc) USD (Hedged): 16 February 2016
Class A (Dist) USD (Hedged): 16 February 2016
|Minimum Investment||S$1,000 (initial)
|Fees||Subscription fee: 3% p.a.
Management fee: 1.1% p.a.
|Subscription fee: currently up to 2%; maximum 5%
Management fee: Currently 0.63% p.a., maximum 1.5% p.a.
1Bloomberg, “Singapore Inflation at Highest in 14 Years on Food, Fuel”, August 2022
2ADB Data Library, Inflation Rate in Asia and the Pacific, Asian Development Outlook (ADO), September 2022
3Singsaver, 13 Best Fixed Deposit from Top Banks in Singapore To Lock In Your Savings (October 2022), October 2022
4RinggitPlus, Best 12 Month FD Rates, October 2022
5Kontan.co.id, Suku Bunga Deposito Lhbu (Laporan Harian Bank Umum), October 2022
6Bank of Thailand, Deposit Rates for Individuals of Commercial Banks, October 2022
7UOB Asset Management, United Asian Bond Fund, October 2022. Please visit www.uobam.com.sg for details on the full list of our awards.
8UOB Asset Management, August 2022
All information in this publication is based upon certain assumptions and analysis of information available as at the date of the publication and reflects prevailing conditions and UOB Asset Management Ltd (“UOBAM”)’s views as of such date, all of which are subject to change at any time without notice. Although care has been taken to ensure the accuracy of information contained in this publication, UOBAM makes no representation or warranty of any kind, express, implied or statutory, and shall not be responsible or liable for the accuracy or completeness of the information.
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