Schroders’ Matthew Dobbs has warned that Asia’s credit markets look to be in a dangerously similar state to before the 2008 market crisis.
Mr Dobbs, who manages the group’s £402m Oriental Income investment trust, said the situation in the corporate bond market was looking particularly stressed, especially against equities.
“The latter do not look excessively expensive in valuation terms, but credit markets look like the unnerving mirror image of where they were in 2008,” he said.
“Then, borrowers faced potentially ruinous rates to access credit. Now, there appears little discrimination in credit as Spain’s borrowing cost converges towards Germany and the US.
“Meanwhile, it is difficult to ignore the rise in geopolitical risks and continued signs of deflationary pressures, in particular a slower growth trajectory in China.”
Mr Dobbs, speaking in the trust’s annual report, said there had been “rising investor optimism” in Asia because of government-led reforms in countries such as China, India, Indonesia and Korea.
“We wish new leadership in India and Indonesia well, but progress is likely to be very slow going and current euphoria will be subject to severe testing,” he said.
“For Korea, we need to see more convincing evidence of better corporate governance than has been in evidence thus far.”
In terms of China, Mr Dobbs said growth had “stabilised”, while the currency had started to appreciate and property prices were less volatile.
“While this may appear good news, our firm view is that there is already too much credit in the economy, which really needs a sustained period of tightening, not more loosening, to resolve the bad debt problems,” he said.
