Authors
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.
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.
Important Information
The contents of this document may not be reproduced or distributed in any manner without prior permission.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.
Authors
Topics