“The balance of risks to the near-term growth outlook is tilted to the downside.” That’s the key conclusion of the most recent International Monetary Fund (IMF) semiannual World Economic Outlook.

Threats to Asia are acute. China’s growth is forecast to slow to 7.8 percent, down from a prior estimate of 8 percent. The IMF reduced its estimate for India to 4.9 percent from 6.1 percent and also forecast “less buoyant” short- and medium-term growth for Asia as a whole, noting that more slowing in China’s investment surge will hamper regional manufacturers.

Adjustments in China and India led the IMF to trim projections for developing Asia to 6.7 percent from 7.1 percent.

In Japan, growth is expected to reach almost 2.3 percent in 2012, this recent strength relative to the immediate past attributable to reconstruction activity and some rebound in manufacturing activity in the first half of 2012 following the March 2011 earthquake and tsunami. But the effects of these factors will fade, however, and growth is projected to moderate to 1.3 percent in 2013.

Korean growth is projected to moderate to 2.7 percent in 2012 but to pick up to about 3.5 percent in 2013. Weaker demand from abroad is the main factor that will lead to “generally modestly weaker growth” in Indonesia, Malaysia, the Philippines, Thailand and Vietnam, although growth in the so-called ASEAN-5 is projected to accelerate slightly to 5.7 percent in 2013, up from about 5.5 percent in 2012.

As for Australia, the IMF projects the economy will grow by 3.3 percent in 2012, in line with Reserve Bank of Australia (RBA) forecasts. Growth in 2013 will be 3 percent, down from a forecast of 3.5 percent in the IMF’s World Economic Outlook.

And if the eurozone crisis deepens and the US fails to negotiate its coming “fiscal cliff” even these rather downcast bets are off.

The IMF’s forecast of slowing global growth reflects the general position that the world economy is being held back by weakness in the US, Europe and China. Australia, of course, is directly exposed to such a slowdown because of its heavy reliance on commodity exports. The RBA identified weakening global demand when it reduced its benchmark interest rate from 3.5 percent to 3.25 percent on Oct. 2.

Futures markets are pricing in another rate when the RBA next meets on Nov. 6. Another 25 basis point cut would take the official cash rate to 3 percent, where it was during the global financial crisis in 2008.

As of now Australia’s official policy rate is the highest such rate in the developed world, even after three cuts totaling 75 basis points in 2012. It remains one of the strongest developed-world sovereign credits, with AA/Aaa ratings from all three major ratings agencies, with “stable” outlooks from all three as well. It boasts the second-lowest ratio of government debt to gross domestic product in the world.

Unemployment is around 5 percent, and more Australians are entering the labor force. Inflation remains within the RBA’s target range.

This interest rate spread makes its government-issued debt look relatively attractive. Combined with Australia’s solid underlying fundamentals, evidenced by the fact that the country has gone more than two decades without entering recession, its strong fiscal position and its traditional approach to monetary policy, demand for Australian-dollar denominated assets has strengthened markedly in recent years.

The Australian dollar has basically moved in tandem with the price of iron ore, the country’s largest export, over the last half-decade or so. But this relationship began to break down in late 2011. The aussie has remained resilient, while prices of iron ore have trended lower.

In fact during 2012 the relationship has actually moved to a negative correlation: As iron ore prices, and those for other key export commodities such as coal, have moved lower the aussie has generally trended higher.

These recent movements defy the long-held belief that the Australian dollar is simply a proxy for commodity strength. Part of the explanation for this breakdown is that a significant increase in foreign purchases of Australian bonds has also driven capital into Australia, complementing the huge flow of mining and resource investment from abroad.

Foreign central banks and sovereign wealth funds (SWF) have been making concerted efforts to diversify their reserves, with Australian bonds an increasingly attractive alternative.

These foreign purchases reflect some increase in the supply of bonds to finance government budget deficits. But the share of bonds held by foreigners has jumped from 57 percent in 2006 to 77.5 percent as of June 2012. Some estimates suggest that up to a third of Australian government bonds are held by central banks aiming to diversify their holdings from the US dollar.

According to IMF data, “other” currencies, a category that includes the Australian dollar, now rank third overall in terms of official foreign exchange reserves. “Other” surpassed the Japanese yen to take fourth place during the fourth quarter of 2009 and leapt over the British pound for third place in the third quarter of 2010.

The US dollar and the euro remain in first and second place, respectively, but “other’s” share has grown substantially in the 21st century, from 1.49 percent of allocated reserves in 2000 to 5.49 percent in 2011.

The substantial increase in issuance by both non-government and government entities has promoted liquidity and demand in the Australian bond market from foreign investors. Increased demand from foreign entities is recognition of Australia’s strength relative to the rest of the developed world.

This demand reflects Australia’s comparatively low public debt (the federal government’s fiscal position is forecast to move back into surplus in the current fiscal year), strong growth, high interest rates and the reduced global pool of AAA/Aaa-rated assets.

It’s important to note as well that though the IMF has lowered its growth projections for the region’s economies its forecasts for developed world growth continue to illustrate the shift in global growth toward Asia-Pacific.

Europe as a whole will grow, according the IMF, at a rate of 0.1 percent in 2012 and 0.8 percent in 2013, though the Euro Area will actually shrink by 0.4 percent this year before clawing back to 0.2 percent growth in 2013.

Germany will expand by 0.9 percent in 2012 and 2013, leading the way for the Continent’s developed economies. France will eke 0.1 percent growth in 2012, 0.4 percent in 2013. Italy (-2.3, -0.7) and Spain (-1.5, -1.3) are on course for negative growth both years.

The UK will contract by 0.4 percent this year and expand by 1.1 percent next. The US, meanwhile, will grow by 2.2 percent in 2012 and 2.1 percent in 2013, Canada 1.9 percent and 2.0 percent.

Even in the face of short- and medium-term challenges, Asia-Pacific remains the world’s long-term growth engine.

Aberdeen Asia-Pacific Income Fund (NYSE: FAX), a closed-end fund that Roger Conrad introduced to Australian Edge readers in the August 2012 Portfolio Update, is one of only five out of a universe of 106 US closed-end funds with a “Gold” rating from investment research firm Morningstar.

The fund was so cited because it’s the only one of its kind that enables US-based investors to access developing Asia’s debt markets as well as Australia’s. In fact very few funds of any kind provide individuals the opportunity to invest in bonds issued in the difficult-to-reach Asia-Pacific region.

The fund is not just about Australia. It includes significant exposure to bonds of emerging market countries such as the Philippines, Malaysia and Indonesia. Developed and emerging economies in the Asia-Pacific region continue to account for increasing shares of global economic growth.

Accumulated debt in the developed world and the steps that must be taken to address same threaten to impair growth in those markets for years to come. Aberdeen Asia-Pacific is a compelling option for income-focused investors who also seek some protection from the impact of a deteriorating US dollar. At the same time you’ll get paid USD0.035 per share per month, an annualized dividend rate of USD0.42 per share. That works out to a yield of 5.3 percent based on the fund’s Oct. 11, 2012, closing price.

That’s why we’re adding it to the AE Portfolio Conservative Holdings.

Australian government and corporate bonds account for 42 percent of the fund’s holdings.

South Korea is the No. 2 market in terms of geographic exposure with 11 percent of assets, followed by Malaysia and the Philippines (6.9 percent each), Indonesia (6.7 percent), China (5.5 percent), Hong Kong (5 percent), Thailand (4.6 percent), India (4.3 percent) and Singapore (2.8 percent). These countries, along with Australia, account for 95.7 percent of the fund’s geographic exposure.

The fund’s currency exposure is primarily to the Australian dollar at 44.5 percent, while the US dollar accounts for 38 percent due to the fact that 35.6 percent of holdings comprise US dollar denominated bonds issued by foreign issuers.

The Chinese yuan accounts for 5 percent of currency exposure, the Malaysian ringgit 2.4 percent, the South Korean won 2.3 percent, the Indonesian rupiah 2.2 percent, the Thai bhat 2 percent, the Indian rupee 1.3 percent, the Singaporean dollar 1.1 percent, the Philippine peso 0.7 percent, the Hong Kong dollar 0.3 percent and the New Zealand dollar 0.2 percent.

The fund’s returns are denominated in US dollars. Performance is affected by how the US dollar fares against these currencies, though it is highly correlated with the Australian dollar’s movements against the buck.

As of Aug. 31, 2012, the fund’s net assets, including USD600 million in bank borrowing, amounted to USD2.6 billion. Net asset value per share (NAV), which is updated on a daily basis, was USD7.74 as of Oct. 11. As of this writing shares in the fund were changing hands on the New York Stock Exchange at USD7.92, a 2.2 percent premium to NAV, a solid value given its track record and generous yield.

The Treasury Corp of Victoria 5.75 percent bond maturing Nov. 15, 2016, is the largest holding in the portfolio, accounting for 5.8 percent of investments. Victoria is geographically Australia’s smallest state but is the country’s most densely populated. Seventy-five percent of Victorians live in Melbourne.

The next five biggest holdings are Australia government bonds maturing between 2014 and 2023 with coupon rates ranging from 2.2 percent to 4.6 percent.

The fund also holds a March 2017 Korean government bond paying 3.5 percent, two Queensland Treasury Corp bonds, one maturing in 2021 with a 6 percent coupon, the other due in 2019 with a 6.25 percent coupon, and a 10 percent bond maturing in 2018 issued by St. George Bank Ltd, which is now part of Westpac Banking Corp Ltd (ASX: WBC, NYSE: WBK) among its top 10 allocations.

The top 10 holdings account for 28.7 percent of invested assets.

As of Aug. 31, 2012, the holdings of the portfolio represented approximately 60.7 percent sovereign and state government securities, 4.3 percent “supranationals,” 33.1 percent corporates, 1.3 percent cash and 0.6 percent mortgage-backed securities.

(“Supranationals” are international institutions that provide development financing, advisory services and/or other financial services to their member countries. Examples include the World Bank’s International Bank for Reconstruction and Development, the International Finance Corporation, the European Bank for Reconstruction and Development, the African Development Bank and the Asian Development Bank.)

As of Aug. 31 69.1 percent of the portfolio was invested in securities where either the issue or the issuer was rated A or better or was judged by the fund’s manager to be of equivalent quality; 36.1 percent of holdings were rated AAA or Aaa, 11.1 percent were rated AA or Aa, 21.9 percent were rated A, 13.6 percent were rated BBB or Baa, 16.4 percent were rated BB or Ba and 0.9 percent were rated B.

The average maturity of the portfolio at the most recent reporting date was 7.1 years, with 20.4 percent of holdings maturing in less than three years, 24 percent maturing in three to five years, 41.3 percent maturing in five to 10 years and 14.3 percent maturing in more than 10 years.

The fund’s borrowings–or leverage–are limited to a syndicated loan facility that renews annually. As of Aug. 31 the outstanding balance on the loan was USD600 million, unchanged from the previous month. The fund uses the facility to boost returns by borrowing at interest rates that are lower than the relatively higher yields of its portfolio holdings. It uses interest rate swap agreements to fix the interest payable on a portion of the facility.

Australia is tied to emerging-market growth in Asia, particularly China. The Middle Kingdom has been the prime catalyst for a resource boom that’s powered the second half of Australia’s 20-year run without slipping into recession. Indeed the Lucky Country was spared the worst effects of the global financial crisis-led Great Recession, as it was the ills of the dot-com driven 2000-01 downturn.

The fundamental strengths as well as the strong fiscal positions of Australian state and federal governments also instill confidence in investors seeking to diversify away from the troubles afflicting the United States, for example, with its non-traditional monetary policy and potential “fiscal cliff.” Australia’s proximity to high-growth Asian economies ensures it will have markets for its ample stores of iron ore, coal, natural gas and other resources for decades to come.

Australia remains a “risk on” play, as its fortunes are clearly tied to global demand growth, particularly from Asia. When prospects are bright and investors are bullish, the Australian dollar rallies. When the mood darkens and money searches for safety, the aussie sells off.

But over the course of the past decade investors–institutions as well as sovereigns–have purchased increasing amounts of Australian-dollar denominated bonds, corporates and governments. This diversification has come at the expense of developed world currencies such as the US dollar, the British pound, the euro and the Japanese yen.

For those who want a steady yield and currency play with little credit or interest rate risk, new AE Portfolio Conservative Holding Aberdeen Asia-Pacific Income Fund is a solid buy up to USD9 on the New York Stock Exchange using the symbol FAX.

Closed-end funds (or closed-ended funds) are mutual funds with a fixed number of shares (or units). Unlike open-end funds, new shares/units are not created by managers, to meet demand from investors, but the shares can only be purchased (and sold) in the market.

Under US tax rules applicable to such funds, the amount and character of distributable income for each fiscal year can be finally determined only as of the end of the fund’s fiscal year. The fund anticipates that sources of distributions to shareholders may include net investment income, net realized short-term capital gains, net realized long-term capital gains and return of capital. The estimated composition of the distributions may vary from time to time because the estimated composition may be impacted by future income, expenses and realized gains and losses on securities.