Asia: An investor playground amidst volatility

With interest rates low and falling across many global markets, high-yielding Asian markets are standing out. Bonds worth over $15 trillion – about a quarter of the debt issued by governments and companies globally – now yield less than zero^[1].  Yet 10-year government bonds in countries such as India^[2] and Indonesia^[3] still yield as much as 6%-7%. 

The US Federal Open Market Committee (FOMC) and central banks are responding to weaker growth, spelling the likelihood of an impending monetary-easing cycle. In a sudden reversal from its stance at the end of 2018, the FOMC has moved from tightening rates to easing them, as it focuses on reducing inflation and stalling faltering growth. Other central banks are signalling a similar approach, as economic activity drops globally.

The US-China trade tensions have exacerbated the situation, but they are not the root cause. The seeds of lower global growth were already sown by the time tensions escalated in the first half of 2018. 

The prospect of lower interest rates is evidently positive for fixed-income markets globally. However, this will be most beneficial for Asia – local policy rates were too high to begin with, leaving room to cut them aggressively. Furthermore, the FOMC’s interest rate cuts are likely to end a seven-year period of US dollar strength, further alleviating inflationary pressure in Asia and creating even more room for rate cuts.

The current situation could not be more different to 2018. It was a difficult year for Asian fixed income, but one that laid the foundations for today’s benign environment.

In 2018, the FOMC tightened monetary policy and US long-term rates rose. This trend underpinned the strong US dollar, ratcheting up inflationary pressures in Asia. Higher oil prices then added to the pressure and, as a result, several countries were left with little option but to raise policy rates to avoid importing inflation. Interest rates ended the year higher than they needed to be.

Fast forward to 2019, and GDP growth is slowing across Asia. While this slowdown is most pronounced in north Asia, growth across southeast Asia is also decelerating. As growth slows, southeast Asia’s central banks have more room to cut policy rates than others, to the benefit of bond markets.

Despite the general slowdown, some markets in south and southeast Asia still have relatively high growth and interest rates. For example, the bank’s projection for India’s GDP growth is about 7% in 2019, Indonesia’s is 5%, Malaysia’s between 4.5% and 5% and around 6% to 6.5% for the Philippines. This stands in sharp contrast to north Asia, where South Korea and Taiwan have far lower growth rates, of about 2%, due in part to the downturn in the technology sector.

With far more room to cut rates, it stands to reason that India and Indonesia, for example, will have better-performing bond markets than the likes of South Korea and Taiwan. 

The markets now in this favourable position are in fact those that were hardest hit in the Asian financial crisis of 1997 that was partly caused by high current account deficits. Since then, countries such as Indonesia have substantially reformed their economies to become far more resilient today. This suggests that Asian currencies will continue to become more stable, and that the gap in yields compared with developed economies should narrow somewhat.

Looking forward, the prospects for many Asian countries’ fixed-income markets look broadly positive for years to come. Even with the current slowdown in growth, many of these markets are booming; India’s is growing at 7% a year, and Indonesia’s growth rate might also increase towards 7% if president Joko Widodo uses his recent election victory to implement reforms. At growth rates of 7%, economies double in size every 10 years. As economies grow, so fixed-income markets tend to expand and open up, creating more opportunities for investors.

China is a perfect example of this. While growth slowed to 6.2% in the second quarter of 2019, China has enjoyed 30 years of high growth rates, which has transformed the size of its economy.  Its near $13 trillion onshore bond market is now the world’s third biggest, and it is increasingly diverse  – with a broadening of the credit market that allows investors to be more tactical.

Returning to the second half of 2019, the bank’s prediction is that FOMC interest rate cuts will trigger a fall in the US dollar against Asian currencies, diluting inflationary pressures in Asia still further. This should be the catalyst for the region’s most attractive bond markets to outperform. 

Uncertain times for the global economy present a silver lining for south and southeast Asia. Expect a virtuous circle of stronger currencies, lower inflation, falling rates and rallying bond prices.

^{[1] “Negative rates: investors go through looking-glass to sub-zero yields”. FT. August 13, 2019, para 2. https://www.ft.com/content/820e3aac-ba1a-11e9-8a88-aa6628ac896c}

^{[2] Trading Economics, as of August 13, 2019, summary para 1.
https://tradingeconomics.com/india/government-bond-yield}

^{[3] Trading Economics, as of August 13, 2019, summary para 1.
https://tradingeconomics.com/indonesia/government-bond-yield}

About the Authors

Henrik Raber, Global head of credit markets, Standard Chartered
Henrik is responsible for the Capital Markets, Capital Structuring and Distribution Group and Credit Trading businesses. 
He joined the Bank in July 2009 as Regional Head of Capital Markets for Europe, Africa and Americas, and took on the role of Global Head of Debt Capital Markets in March 2010. In Aug 2014, he was appointed as Global Head of Capital Markets, overseeing the Debt Capital Market and Loan Syndications businesses. In April 2017, Henrik was appointed the additional role as Co-Head, Capital Structuring and Distribution Group, where he is jointly responsible for championing the Bank’s Originate to distribute model. He assumed the current role as Global Head of Credit Markets in July 2018. 

Eric Robertsen, Global head of FX, rates and credit research and head of global macro strategy, Standard Chartered
His role includes the development and implementation of investment and trading strategies across all the major asset classes, and exploring cross-asset investment themes and their implications for asset allocation and portfolio management. He joined the Bank in 2014 from Millennium Capital Partners in London. He previously held roles in cross-asset strategy and portfolio management at Deutsche Bank, and has presented at numerous investor conferences. Eric holds an economics degree from Princeton University.

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