Increasing systemic concerns from Europe and a sharp deceleration in the US manufacturing sector could be the tipping points that compel investors to pull out of the Asian bond market and back into treasuries, strategists at Deutsche Bank believe.
The view holds an ironic twist as investors have rallied into the emerging markets credit, local currency fixed income and equity markets to avoid exposure to the G3 economies of the US, Europe and Japan, which have offered less attractive returns on the back of lacklustre GDP performance.
However, Deutsche Bank expects that if the outlook for the G3 deteriorates further fear will overcome greed and investors will be forced to sell out of regional instruments and return to the safe haven of US Treasuries and similar risk-averse investments.
It notes that if the US’s manufacturing ISM Report, which measures growth in manufacturing in the country, drops to under 50% and into the mid forties, it could prompt such a re-think among international investors.
The higher the percentage reported by the ISM, the stronger growth is predicted to be, with scores of under 50% generally indicating a contraction among manufacturing industries in the US.
“Previously we held a massive underweight in our HK dollar cash bond portfolio to express a bullish view on the floating Asian currencies,” said Martin Hohensee, strategist at Deutsche Bank in Singapore. “In this rebalancing we are unwinding that completely, reducing long Asian [foreign exchange] exposure in Chinese renminbi, Indonesian rupiah and Singapore dollars.”
The biggest concern for the bank is in the US, where recent data is indicating an unpleasant decline in manufacturing output likely to negatively impact Asian exports which tend to follow the US trend with a high correlation, according to Deutsche Bank data.
“We may be at the cusp of a fairly significant re-pricing for the more cyclically sensitive Asian bond market,” Hohensee said.