Barclays wealth management eyes Asian local currency bonds

Barclays' global wealth management is betting that local currency bonds in South East Asia will benefit both from economic growth in emerging markets and currency appreciation, an group executive said on Monday.

Khurram Jafree, head of investment advisory in the Middle East and Africa at the Barclays unit, told Reuters that as global investors are getting more bullish on emerging markets, they need to become more creative in finding growth.

"In limiting asset allocation to emerging market equities, then the danger is that... you'll have a repetition of what you had in the past cycles, where equities go up and then you have tremendous pull-backs and then you're back to square one," he said.

Jafree said that Barclays Wealth, the unit that services the banking needs of wealthy clients, was advising clients to buy local currency bonds in Indonesia and South Korea in particular.

"If the emerging market economies continue to do well then their currencies over a period of time should appreciate, and as they appreciate then your return on the local asset classes should do quite well," he said.

Additionally South East Asian countries are increasingly exporting to China, as some investors shift production into the region due to a rise in labour costs in China.

Beijing relaxed currency controls in June, sending its yuan to a five-year peak, and it could let the currency appreciate further over the long-term as trading partners pressure it to reduce a large trade surplus.

A stronger yuan will help countries exporting to China.

"The depeg of the (yuan)…. had a big impact on the rest of the currencies in the region because many of them have re-valued higher."

Jafree said Barclays has allocated about 6 per cent of its portfolio to emerging market bonds and about 8 per cent to emerging markets equities.

Emerging market currencies have risen sharply in the recent past, boosted by expectations that more quantitative easing will drive greater capital flows to emerging markets.

The currency moves have sparked fears of more capital controls by emerging economies, in addition to almost daily intervention in many markets.

He said rising inflation rates were the biggest risk to emerging markets investments at the moment.