India, Korea attractive ,Indonesia a crowded trade

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Markets may be pricing in too much policy tightening in countries such as South Korea and India, creating opportunities for bond investors, a fund manager at Aberdeen Asset Management said on Thursday.

Central banks will also start withdrawing stimulus by draining excess liquidity, which meant less aggressive intervention to limit currency gains, making some of them, including the Indian rupee , a good pick, Adam McCabe told Reuters in an interview.

"We still think policymakers will go gradually and will focus on domestic demand and will keep in mind their vulnerabilities," said McCabe, who manages USD 4.4 billion in assets in Asia-focused funds.

He added that India and Korea were some of his favourites.

The Bank of Korea had once been tipped to be among the first G20 central banks to start tightening policy but the government's opposition to such a move and heightened uncertainty about the global outlook has scaled back those expectations. It left rates unchanged at a review on Thursday.

McCabe said India could ill-afford to keep intervening to keep its currency down as it would flood the banking system with rupees, adding fuel to an already high inflation unless it mopped up excess cash, which in turn would add to borrowing costs.

Singapore-based McCabe, who moved to Aberdeen from Credit Suisse in 2009, said his fund had a long-duration strategy on Korea and was underweight Thailand, where the market has been underpricing the extent of tightening by the central bank.

McCabe was also bullish on Malaysia, expecting it to lag the rest of Asia in raising interest rates and said he favoured the Korean won against the Japanese yen given that South Korean companies were gaining the share of China's market at the expense of their Japanese rivals.

Latest data showed South Korea's exports to China in January nearly doubled from a year-ago period.

Crowded trades

But unlike some of his counterparts, McCabe is cautious on Indonesian bonds and has in fact cut positions recently as foreign investors made a beeline for its high-yielding debt.

Latest data showed foreigners owned a record 117.5 trillion rupiah worth of federal debt early in February after boosting their holdings by USD 2.2 billion or nearly a fifth last year.

McCabe said that even though the medium term outlook for the economy was positive, a risk of a spike in inflation if the central bank kept rates on hold for too long or a lack of progress in reforms could shatter investor confidence.

"Foreigners love the place and it worries me when a trade is so crowded as all it needs is a policy mistake for the herd to head to the door," McCabe said.