Speaking to InvestorDaily, HSBC global chief investment officer for fixed income Xavier Baraton said an exposure to global corporate bonds can improve portfolio diversification as well as risk-adjusted returns.
“That’s typically what an exposure to global corporate can provide and that the Oz Corp market cannot provide to the same extent,” said Mr Baraton.
The second argument for diversifying away from Australian fixed income is that the local market has a lot of “idiosyncratic risk”, he said.
“It’s due to the geographical location [of Australia], and the nature of its trade with other countries,” said Mr Baraton.
“What it means, in terms of investment, is that the bond market and the equity market have relatively low correlation.”
There are very low correlations between Austarlian government bonds and global government bonds, global corporate bonds and emerging market debt, said Mr Baraton.
“It’s not necessarily something that is well understood, or an opportunity that is actively sought out and investigated by superannuation funds in Australia,” he said.
Specifically, Mr Baraton said the correlation between Australian government bonds and emerging market debt is “close to zero or even slightly negative”.
“With high yield it’s slightly negative at around negative 10 per cent. For investment grade corporate bonds the correlation with Australian corporate bonds and US corporate bonds is at around 35 per cent,” he said.
“If you mix you understand that you can grab potentially better returns and reduce the risk.”
