More monetary stimulus from the US Federal Reserve will have even less of an impact on Asian debt markets than the two previous initiatives, argued a conference panel last week.
The third round of quantitative easing (QE3) was announced on September 13 and has attracted much comment. It was among discussions at AsianInvestor's and FinanceAsia's inaugural Southeast Asian Debt Investor Forum staged in Singapore last week.
For a start, most in the market feels QE3 will do little to solve the economic problems in the US, says David Carbon, head of economic and currency research at DBS in Singapore.
The problem, he argues, is that the Fed may have expanded its balance sheet by more than $2 trillion since 2008, but this liquidity has not gone into the economy. Banks have been reluctant to take advantage of the money on offer, so 80% of it is still sitting at the Fed in the form of reserves.
“The key question is ‘are we going to see big inflows into Asian markets following QE3?’” adds Carbon. “The simple answer is no.
"If the money doesn't go into the US economy, it can't come flooding over to Asia the morning after," he argues. "We haven’t so far seen significant inflows into Asia for almost a year now, and the reason is concern over the eurozone crisis.”
Others make similar points. Manraj Sekhon, CEO and chief investment officer at Singapore's Fullerton Fund Management, says: “QE3 having a big effect on the underlying economy globally is asking too much right now. International investors were already more comfortable investing in Asia before QE3."
And since the Fed’s stimulus will be fairly open-ended – until the labour market improves significantly – the “financial put” it provides is set to be around for a while. That liquidity is what the markets want to some extent, says Sekhon, but it may present a risk of asset prices spiking “before fundamentals have had a chance to catch up, as it were, in Asian domestic markets”.
Still, in the short term, the higher liquidity will help, he says. “It’s difficult to find value in the Asian debt markets the same way as six to nine months ago," argues Sekhon. But in light of increased liquidity and the generally good quality of issues, he still feels there is upside, albeit on a more selective basis than before.
“There’s a lot more liquidity coming into the bond market from QE, plus there are new groups of investors coming in. Also, technicals have been very supportive,” notes Sekhon. “But downside risks could be more severe than in the past. I wouldn’t describe Asian US dollar credit markets as very attractively priced right now, for example.”
Sean Chang, head of Asian debt investment at Baring Asset Management in Hong Kong, is also fairly bearish on the Asia USD credit market. Asia saw substantial investment inflows after the previous two QE injections, he notes, but this time around GDP growth is weaker in the region. “So people are wondering whether they should still put their bets in Asia USD credit.”
Chang notes also that the Bank of Japan last Wednesday announced another stimulus programme of bond buying of its own. But whether more inflows come into Asian US dollar credit will depend on the economic trend for growth, more than it will on such measures.