Adrian Zuercher
Senior investment strategist, asset management
Credit Suisse
The prospects for Asian local-currency fixed income markets look favourable in our view. We do not share the fear of many that the global economic slowdown will hurt the appetite for the Asian bonds. On the contrary, the erosion of returns in the core markets, either driven by liquidity creation or weak economic growth expectations, will intensify the search for yield.
Within Asia, we have seen a renewed round of easier monetary policy lately. Yet, the recent drop in inflation has been such that many Asian central banks have, by one definition, not been easing policy rapidly enough. In fact, average real rates in Asia have slightly risen in recent months and not declined.
We, therefore, see ample room to implement further growth supportive policies as the balance of risk has tilted from inflation to growth. Monetary policy is providing the first line of defence, but fiscal policies remain a valid option as well. Fiscal policy is in particular important as exports have dropped due to spillover effects from Europe.
To avoid sudden weakness feeding on itself, measures are needed to bridge the lull in growth. However, manoeuvering room on fiscal and monetary side is not uniform. In thinking about which countries we want to be overweight, we focus on two indicators: the prospect of lower real rates and the capacity of fiscal intervention.
Accordingly, our favorite markets to receive rates are Korea, China and the Philippines. We are less optimistic on Indonesia and Malaysia as we believe these two countries have least policy flexibility in the current environment.
Andre de Silva
Head of Asia Pacific rates
HSBC
Another round of liquidity pumping from the Fed, with an asymmetric bias towards QE3 (quantitative easing 3), and the ECB (European Central Bank) contemplating fully fledged QE of short-dated bond purchases is likely to seep across to emerging markets, particularly Asia as past precedence shows.
Searching for yield, albeit selectively, is likely to benefit Asian local rates given the resumption of positive real yields. Inflation fears for the region are overdone and more than overshadowed by decelerating growth led by a collapse in exports.
One risk is a more pronounced back-up in US Treasury yields, but this appears to be contained. In spite of the blip in mid-August, long duration and receiving swap rates remain the theme for Asia.
A long duration stance versus HSBC’s Asian Local Bond Index (ALBI) benchmark is favoured. Regionally, a bullish view is held on China, Singapore, Korea and Thailand bond markets. In the case of Singapore and Korea, this view is also encouraged by the presence of a high correlation of local bonds with US Treasuries.
The prospect of further monetary easing in China, and Thailand due to follow suit, warrants an overweight stance in the respective bond markets. In contrast, government of India bonds are recommended to be underweight. In India, supply concerns are expected to resurface during September and yields could surge higher despite the possibility of easing by the central bank.
Only a markweight stance is also advocated for Indonesia as the surprise narrowing of the FASBI (Bank Indonesia Deposit Facility) corridor on August 10 still leaves policy uncertainty and foreign outflows have been evident again.
Frances Cheung
Senior strategist
Crédit Agricole CIB
It has been our long-held view that selected Asian LCY (local currency) government bonds provide yield pick-up against the resilient economic backdrop for foreign investors. CGBs (China government bonds) and KTBs (Korea Treasury bonds) have been our top picks.
For asset swap trades – investors buying LCY government bonds on an FX hedged basis, G-Sec (government securities) in India and Korea Treasury Bonds (KTBs) provide attractive yield pick-up. However, we would like to avoid G-sec due to the twin deficits – current account and fiscal deficits – in India.
For central banks that are looking to diversify their reserves, renminbi – due to rising importance of China, and the Korean won – due to the sizable economy and relatively deep bond market, are likely candidates. As such, China government bonds and KTBs will benefit. The risk is higher for US Treasury yields, which would render the yield pick-up from asset swap trades narrower. Another worry that investors may have is the outperformance of bonds over equities.
The Hong Kong-dollar and Singapore-dollar government bond markets look the most overvalued compared with their own equity markets, as Hong Kong dollar and Singapore dollar rates are pressured down by their US dollar counterparts. We do not see relative values in EFBNs (Exchange Fund Bills and Notes) in Hong Kong, or SGS (Singapore government securities).
The gap between equity earnings yield and CGB yields is also wide, at about three-fourths of the widest during 2008. That said, we remain constructive on CGBs, as they are likely to benefit from investor desire to gain exposure when the renminbi is gradually internationalised.