The US Federal Reserve’s rising interest rates, inflation and ongoing trade disputes between the US and China have inevitably had an impact on Asia’s fixed income market. However, a publication recently released by Manulife Asset Management reveals a more nuanced relationship between bonds and rising interest rates.

The asset manager’s Asian fixed income: the diversifier in a rising interest rate environment (Q2, 2018) report shows emerging market bonds actually outperformed US bonds through the first two months of 2018; Asian credit spreads were relatively stable during this time and overall, the bond market remains resilient despite volatility. This demonstrates that bonds do not necessarily suffer when rates rise, a fact borne out in previous cycles.

The region’s economic diversity plus growth being created by emerging markets economies with long-term financing needs is yet another reason Asian fixed income remains a compelling option for investors.

This year’s bumpy ride has resulted in a reversal of regional portfolio debt inflows in some markets. As the easy carry trade ended, foreign investors unfamiliar with the Asian market have been concerned about their investments and the overall outlook for the region.

Between January and April 2018, net portfolio debt outflows were particularly significant in Indonesia, Malaysia, Thailand and India, as investors responded to higher interest rate expectations and a stronger trade-weighted US dollar. As Figure 1 shows, not all economies reacted negatively; despite its capital inflow slowing in March and April 2018, South Korean foreign investment stayed positive in Q1.

In fact, Asia is better positioned than other emerging markets. The region has strong growth, maintains fiscal discipline and enjoys high levels of foreign reserves. Asian countries have acted swiftly, Indonesia raised its benchmark interest rate in mid-August, which is the fourth time in three months, and it has already taken steps to stabilise its currency in order to stem outflows. Meanwhile, the Reserve Bank of India raised rates in June and August to counteract rising inflation. Since real rates in many countries still remain below 2016 levels, Manulife Asset Management believes they remain a key tool to help mitigate inflationary pressures and currency depreciation. 

Figure 1: Foreign flows into Asian bonds

Figure 1: Foreign flows into Asian Bonds
Source:*

Finding value and opportunities

In the current climate, finding resilient and attractive returns means identifying opportunities created by volatility, and adopting an effective strategy with long-term goals. Despite challenges to the Asian bond market, the firm believes attractive opportunities can still be found from three sources of returns: interest rates, credits and currencies.

Manulife Asset Management finds attractive returns for investors in these areas:

  1. China’s bond market still offers opportunities to investors.  Since the onset of global trade tensions, the Chinese government has introduced more accommodative monetary policy and fiscal policy to shore up economic growth. This policy change has improved onshore financing conditions and led to market repricing. In this environment, some state-owned enterprises (SOEs), as well as policy-bank debt offerings, look appealing.
  2. Indonesia came under pressure during the summer with capital outflows placing additional pressure on an already weakened rupiah. Since then, Bank Indonesia has raised interest rates 125 basis points in three months to support the currency. Indonesia remains attractive due to its strong economic fundamentals and sound fiscal management policies, as well evident in upgrades of Indonesia’s sovereign credit rating.
  3. The stronger US dollar has negatively impacted Asian currencies. If the existing dynamic continues, mean reversion could take place, creating investment opportunities in Asian currencies.

Wide Coverage of Manulife Asset Management’s Asian Fixed Income Team

Working across 14 fixed income markets in the region provides diversity to Manulife Asset Management's investment team of more than 50 Asian-based fixed income professionals who cover over 500 Asian sovereign and corporate credit issuers. 

Manulife Asset Management sees Asia as providing unparalleled opportunities for investors seeking income. Its strong local presence in such a diverse market enables the investment team to cover Asian fixed income comprehensively.

More information is available here:

Source* South Korea Financial Supervisory Service; Indonesia Finance Ministry; The Thai Bond Market Association; Bank Negara Malaysia; Thomson Reuters Eikon//Gaurav Dogra/Patturaja Murugaboopathy, May 15, 2018.

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