Capitalizing on Economic Growth: Asia Local Debt

Chief Investment Officer, Fixed Income and Model Portfolios

Policy makers and economists throughout the world are lowering their current outlook for global growth.1 As investors adjust their portfolios to account for potentially lower levels of output growth2 in 2013, many might consider a greater allocation to countries that, as a region, are currently growing at the fastest pace globally. Long heralded as “Asian Tigers,” many of the region’s fastest-growing economies are poised to lead on the global stage. After a year that has seen modest regional currency underperformance compared to Emerging Europe and Latin America due to concerns about a prolonged slowdown in China, 2013 could provide a positive backdrop for Asian outperformance as investors shrug off earlier economic concerns. When focusing on fundamentals, we believe the prospects for Asia are indeed some of the brightest across the developed as well as the emerging markets. While faster-growing economies give investors a feeling of comfort, the pace of economic growth doesn’t always lead to investor profits. In these particularly uncertain times, it may make sense to gain exposure to these growing economies through debt denominated in the local currencies of the region. At WisdomTree, the Asia Local Debt Fund (ALD) provides a broad-based exposure to 12 debt markets of economies currently growing at faster rates than the U.S.; the Fund currently provides exposure to the following emerging market countries: Indonesia, South Korea, Malaysia, Singapore, Thailand, China, Hong Kong, India, the Philippines and Taiwan. In addition to emerging markets, the Fund also provides exposure to the debt of Australia and New Zealand. As Asia continues to expand, it will require increasing amounts of natural resources to sustain regional development. We believe Australia and New Zealand are both uniquely positioned to benefit from these trends in development and trade. In 2013, China could serve as a catalyst for investment rather than as the drag on performance that it was for much of 2012. Currently, interest rates are approximately three times higher in Asia than in many developed markets (providing a distinct carry advantage). While higher interest rates have attracted some investors, these countries’ projected growth rates lead many economists to call for continued appreciation of their currencies against the U.S. dollar. On average, currencies in ALD are undervalued compared to their long-term purchasing power by over 18%.3 While few economists believe these currencies will adjust to their long-term targets overnight, the presence of these currency tailwinds could lead to eventual return opportunities for investors. In 2013, we believe that central bankers in the United States, United Kingdom, Japan and the Eurozone will continue to expand their balance sheets in an effort to lower interest rates and depreciate their currencies (thus making their exports more attractive to foreign buyers). With such implicit pledges in place, investors could consider diversifying into currencies that are historically undervalued and economies that are growing at faster rates than many developed markets. As G3 central banks continue to debase their currencies and lower interest rates through monetary stimulus, investors will continue to search for yield, oftentimes outside their domestic markets. As we noted in another blog post, the Chinese yuan reached an all-time high exchange rate against the U.S. dollar in mid-November. While buying a currency near its all-time high may make some hesitate, we believe there are deeper structural factors at play that could give rise to a yuan that continues to appreciate against the U.S. dollar. However, with much - growth yet to occur in Asia, most Asian currencies still remain below their historical highs. Taking a look at the currencies in ALD, most countries are, on average, close to 8% below their five-year highs.4 Included in this calculation is the Indian rupee, which has depreciated to all-time lows on the back of inflation, deficit and growth concerns early in 2012. While the war is hardly won, investors could consider investing in the country, which many predict will eventually overtake China as Asia’s growth engine.5 With solid fundamentals and economic expansion, it may be possible for many Asian currencies to break through all-time-high exchange rates against the U.S. dollar in 2013.     1JPMorgan, International Monetary Fund (IMF), October 2012. 2As measured by gross domestic product (GDP). 3IMF, WisdomTree, November 30, 2012. 4WisdomTree, November 30, 2012. 5Standard Chartered, “The Super-Cycle Report.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Unlike typical exchange-traded funds, there is no index that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objective will depend on the effectiveness of the portfolio manager. Due to the investment strategy of this Fund, it may make higher capital gains distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

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About the Contributor
Chief Investment Officer, Fixed Income and Model Portfolios

Rick Harper serves as the Chief Investment Officer, Fixed Income and Model Portfolios at WisdomTree Asset Management, where he oversees the firm’s suite of fixed income and currency exchange-traded funds.  He is also a voting member of the WisdomTree Model Portfolio Investment Committee and takes a leading role in the management and oversight of the fixed income model allocations. He plays an active role in risk management and oversight within the firm.

Rick has over 29 years investment experience in strategy and portfolio management positions at prominent investment firms. Prior to joining WisdomTree in 2007, Rick held senior level strategist roles with RBC Dain Rauscher, Bank One Capital Markets, ETF Advisors, and Nuveen Investments. At ETF Advisors, he was the portfolio manager and developer of some of the first fixed income exchange-traded funds. His research has been featured in leading periodicals including the Journal of Portfolio Management and the Journal of Indexes. He graduated from Emory University and earned his MBA at Indiana University.