PERSPECTIVE3-5 min to read

Watch: Market regime shift and Asia fixed income

Staying nimble and pulling multiple levers as we enter a new market regime is critical for Asian fixed income investors.


Why we remain optimistic on Asia bonds?

2022 was an exceptionally tough year with rising inflation, financial tightening, and geopolitical risks. Despite these headwinds, Asian bonds displayed great resilience and outperformed most other major bond markets.

Bond Market Total Return in Year 2022 and Jan YTD

Looking ahead, we are optimistic about this asset class for a few reasons. Firstly, the rate-hike cycle globally is nearing its peak. Secondly, growth differential between the US and rest of the world will further narrow. Lastly, we anticipate that strength of the US dollar will continue to reverse, which will allow Asian currencies to find a more stable footing.

What parts of the Asian bond market look attractive?

In the Asian sovereign space, we are constructive on countries where central banks were early hikers and real yields look attractive, such as Singapore, South Korea, and Indonesia. Meanwhile, Indian rates will likely underperform given unfavourable demand-supply balance and expected weakness of the currency. Overall, we believe Asian local currency bonds have a lot to offer with both currency appreciation opportunities and diversification benefits.

Why we like Asian dollar credit?

For Asian dollar credit, we think it’s an attractive opportunity for investors to earn income and take advantage of improving corporate fundamentals. We continue to prefer investment grade over high yield as it offers quality risk-adjusted income. Credit spreads have compressed in the past couple of months to reflect positive developments in China and improving risk sentiment globally. The valuation still looks fair to us, and we see pockets of opportunities in sectors such as financials, technology, quasi-sovereigns, and Macau gaming.

How can investors best navigate the current market environment?

We believe investors are entering a new market regime where monetary policies have normalised, liquidity is not as abundant as in the past decade, and higher volatility is the new norm. It’s therefore critical for active bond managers to stay nimble and generate alpha by pulling multiple levers, be it interest rates, currencies, or credit spread. In this regard, we see plenty of opportunities in the Asian bond universe.

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