The allocation to India by Asian fixed-income funds has increased markedly in recent years, even as India’s weighting in prominent benchmark indices has remained relatively stable, underscoring the favourable sentiment among fund managers toward the country, according to Morningstar.

Over the past three years, India’s weighting in JP Morgan Asia Credit Index (JACI) has consistently hovered between 6-7 per cent while the average India allocation for funds within the Asian bond Morningstar Category has climbed to 10 per cent in December 2023 from 8 per cent in 2021.

Similarly, within the Asian high-yield bond category, the average India weighting surged to 17 per cent from 13 per cent over the same period, while the weighting in the JP Morgan Asia Credit Index Non-Investment Grade Corporate Index has remained broadly stable between 16-17 per cent.

Rising allocation

The allocation to India among Asian high-yield bond funds has notably risen over the past year.

Pimco Asian High Yield, with $2.4 billion in assets under management, has increased India exposure to 20 per cent of assets as of February this year from 15 per cent a year ago. This constitutes its highest country allocation within the portfolio and an approximately 4-percentage-point overweighting relative to its benchmark.

Similarly, BGF Asian High Yield, another large fund in this category with $1.5 billion in assets under management, allocated roughly 20 per cent of its assets to Indian bonds at the end of February, representing a 4-percentage-point overweighting relative to its benchmark.

At HSBC Asian High Yield, India constituted the fund’s largest active overweight position (5 percentage points higher than its prospectus benchmark) as the managers preferred the region’s commodity and renewable energy sector names.

“Funds in the Asian bond category primarily invest in investment-grade bonds and India’s sovereign rating of BBB- positions it at the lowest end of the investment-grade spectrum. Consequently, the pool of investment-grade Indian issuers is relatively limited and mainly consists of quasi-sovereigns, major Indian banks and large conglomerates,” said Arvind Subramanian, Senior Analyst, Manager Research, Morningstar.

India’s weighting in the JACI stood at 6 per cent as of February 2024, notably lower than the 17 per cent allocation within its high-yield counterpart, the JACI Non-Investment Grade Index.

Muted supply

The majority of Morningstar’s analyst-rated Asian bond funds also increased their exposure to India. Funds such as DWS Invest Asian and LO Funds Asia Value Bond had 21 per cent and 17 per cent of their portfolios in Indian bonds as of February, the largest market weightings for both funds.

While most asset managers are optimistic about India’s macroeconomic outlook, some believe the valuations are unappealing, as much of the positive news may have been already factored into bond prices. Another concern shared by most asset managers is the muted bond supply from the country.

In September 2023, JP Morgan announced the inclusion of India’s local-currency sovereign bonds into the GBI-EM Global Diversified Index, effective June. iBoxx will gradually increase the India weighting in its Markit iBoxx ALBI local-currency Asian bond index, to roughly 12 per cent from about 6 per cent over the next three years.

Several funds in the local-currency Asia Bond category have already begun positioning their portfolios to reflect these developments. Pictet Asian Local Currency has 21 per cent in Indian bonds, making it the fund’s largest market allocation and representing a hefty 11 per cent overweighting relative to its JADE Broad Diversified benchmark.