Investing in Asian fixed income in a post-US election world
By Manulife Investment Management
5 Jan 2021
Investing in Asian fixed income in a post-US election world
Asia possesses many growth drivers that are adapting to the way people consume, react, and transact in a post-pandemic world. For one, Asia still maintains higher GDP growth differentials versus developed markets. As the region becomes increasingly self-reliant and develops its own trading, technology, and consumption ecosystem, we believe investors who want a stake in Asia will need to explore more opportunities in this part of the world.
As at the time of writing (1 December 2020), President-elect Joe Biden was declared the winner of the election on 7 November, and President Trump has not formally conceded defeat1. Assuming Biden presidency continues in 2021, we believe the outcome of the US presidential election should be constructive for Asian fixed income market.
How will a Biden presidency potentially affect the Asian fixed income markets?
- We believe greater clarity and policy consistency are the greatest benefits.
For Asia, we envisage that a Biden administration might bring greater policy consistency where there will likely be more stable and consistently communicated foreign and economic policy from the US. This should be positive for Asian fixed income markets that were impacted by the volatile policy swings and uncertainty caused by the worsening of Sino-US relations.
- Accommodative monetary policy globally and a weaker US dollar will create a more favourable macro backdrop for Asian fixed income.
In the aftermath of the COVID-19 pandemic, global central banks slashed interest rates to cushion the impact of the economic downturn. We expect monetary policy in developed markets to remain accommodative over the near term, particularly in the US where interest rates should remain near zero over the next two-to-three years2. Additional federal spending and lower interest rates should put pressure on the US dollar to weaken. We believe that selective Asian currencies, such as the Chinese renminbi and South Korean won, may benefit from this.
How will Asian fixed income fundamentals be affected by the US election?
In a post-US election world, the fundamentals of Asian fixed income remain intact: diversified economic growth, resilient credit performance, and relatively attractive nominal and real yields.
- Diversified economic growth
The outbreak of COVID-19 dented economic prospects and roiled financial markets across the globe. Asia was no exception, as regional economies contracted in the second quarter in 2020 due to lockdowns and reduced consumption in Western markets. We believe that Asia still boasts some of the best economic prospects globally due to its economic heterogeneity and diversified growth models. According to the latest IMF forecasts, the rate of Asia’s contraction is the smallest projected of all major regions, and Asia is expected to have the strongest economic rebound globally in 20213.
- Resilient credit performance
During the first quarter of 2020 when global markets experienced sharp volatility, US and emerging markets investment grade (IG) bonds suffered great losses, whereas Asian IG bonds held up well4:
Asia’s unique investment grade structure is one plausible explanation for this divergence in performance. The J.P. Morgan Asian Credit Index (JACI) is largely composed of investment grade bonds (77%). Furthermore, a significant component (about 40%) of the Asian bonds market are state-owned enterprises and quasi-sovereign entities that have access to greater economic resources, including government support and bank loans.
We believe that Asia will not be immune from the general trend of credit deterioration globally. We expect to see rating downgrades and defaults to increase gradually over the next two years, but at a relatively lower level in Asia than other regions5. The risk of fallen angels (bonds being downgraded from investment grade quality to non-investment grade quality) in Asia should also be more subdued when compared to other global markets6.
3. Attractive yields
Asian bonds can offer relatively attractive yields compared to developed market bonds. US Treasuries and European
government bonds currently have nominal yields below 1%, with some returning negative real yields7. In contrast,
government bond yields across Asia are higher (such as in China, Malaysia, and Indonesia) with limited levels of
inflation (see Chart 1)8:
The Asian yield premium can also be observed when comparing USD Asian corporate IG bonds with US and European IG corporate bonds (see Chart 2):
In conclusion, we envisage a positive impact on Asian fixed income under a Biden presidency. The clarity of the results, coupled with the possibility of improved policy consistency from US, should be well received by markets. Investors should focus on fundamentals and take advantage of the growth and rate differentials uniquely presented in Asia.
Accessing Asian fixed income opportunities with Manulife SGD Income Fund
Manulife SGD Income Fund aims to capture investment opportunities in the Asian region while delivering income and returns in SGD terms. The Fund invests at least 70% of the portfolio in investment grade bonds for stability, while up to 30% of the portfolio is invested in high yield bonds for better yields and growth opportunities. The investment team adopts a flexible approach in managing the duration risk of the portfolio to adapt to different interest rate environments.
Fund highlights:
- High credit quality portfolio with at least 70% invested in investment grade bonds for stability
- SGD-focused portfolio with all non-SGD positions hedged back to SGD
- Provides investors with a potentially steady stream of income every quarter11
Please click here for more details on the Fund.
Notes
1 On Saturday 7 November 2020, Biden captured the presidency when The Associated Press declared him the victor in his native Pennsylvania at 11:25 a.m. EST. That victory won him the state’s 20 electoral votes, which pushed him over the 270 electoral-vote threshold needed to prevail; Bloomberg: “Biden declares victory, calls on Americans to mend divisions”, 8 November 2020; The Guardian: “Donald Trump refuses to concede defeat as recriminations begin”, 7 November 2020.
2 WSJ, “Fed signals low rates likely to last several years”. 16 September 2020.
3 IMF 2020 Outlook (October version): “Asia and emerging Asia” is forecast to contract by 1.7% in 2020, the smallest rate of contraction among global regions. ‘Low income developing countries’ is forecast to contract less at 1.2%, but this category is combined of markets aggregated from across the world. In 2021, ‘Asia and emerging Asia’ is projected to grow 8.0% in 2021- the highest rate of any region.
4 Source: Bloomberg, 1 January 2020 to 31 March 2020. Asia investment grade bonds are represented by J.P. Morgan Asia Credit Index (JACICTR), emerging markets investment grade bonds are represented by JP Morgan Corporate Emerging Market Bond Index (JCMBCOMP) and the US investment grade bonds are represented by ICE B of A US Corporate Index.
5 Source: Moody’s Investor Services Article:“Research Announcement: Moody's - Expect APAC high-yield corporate
default rate to reach 6% in 2020”, dated 5 August 2020. Moody's baseline scenario predicts a trailing 12-month APAC high-yield nonfinancial corporate default rate of 6.0% in 2020, up from 1.1% in 2019.
6 Standard and Poor’s, as of 30 June 2020. APAC only recorded one fallen angel thus far through the first half of 2020.
7 The 10-year US Treasury boasted a yield of 0.90% as of 13 November 2020.
8 The Indonesian 10-year government bond yielded 6.30% as of 13 November 2020;
9 Bloomberg, as of 13 November 2020.
10 Bloomberg, as of 13 November 2020. The J.P. Morgan Asia Credit Index (JACICTR) represents Asia USD IG, while the JP Morgan Corporate Emerging Market Bond Index (JCMBCOMP) represents EM fixed income, and the ICE B of A US Corporate Index represents US IG credit.
11 The Intention of the Manager to make the quarterly distribution and the distribution yield for the Fund is not guaranteed, and the Manager may in future review the distribution policy depending on prevailing market conditions.
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