How have Asia fixed income markets performed in H1 2022?
2022 has been a challenging year for financial assets so far as markets have been confronted with risks posed by inflation, tightening monetary policy and geopolitics. Major equity indices have fallen into bear markets, while fixed income has suffered by far the worst start to any year on record.
In the first half of the year, Asian dollar credit was down by 10.7% in USD terms, while Asian local currency bonds were down by 9.1% in USD terms. Overall, the Asian fixed income market did not perform as poorly as global bonds, which were down by close to 14% in USD terms.
Are Asia fixed income markets looking attractive again?
As in the sharp market declines in the past, we think the recent price action has reset valuations to levels that are attractive to investors. One obvious reason is that the likelihood of a US recession has been rising as both financial assets and real economies are getting squeezed by tighter financial conditions.
If we look at previous slowdown phases, bonds have typically started to perform well when investors adjust to a weaker growth outlook. And if the US Federal Reserve succeeds in putting inflation in check, which is our base case, we think it would create an even stronger backdrop for bonds.
Positioning in Asia fixed income markets.
In our Asian macro strategies, we have been tactically managing our active duration exposure, focusing on relative value trades. We favor countries where the central banks have started their rate hike cycles earlier, such as Singapore and South Korea where we see better value. We also continue to like China as the monetary policy should remain accommodative given weakening growth momentum.
As for currencies, we continue to overweight the US dollar, Renminbi, Singapore dollar and Malaysian ringgit, funded by underweight in the Taiwanese dollar, Hong Kong dollar and Euro.
In our Asian credit strategies, we’ve been defensive and trimming overall credit beta given macro uncertainties and rising idiosyncratic risks within the China property sector. With the market pricing in a significant amount of rate hikes and negative news, we think the all-in yields look attractive especially for Asia investment grade credit.
As for high yield, we continue to stay cautious and highly selective within China property while seeking opportunities beyond, such as Indian renewable energy and infrastructure, as well as selected commodity names.
In the current market environment, we suggest investors to focus more on the diversification benefits from fixed income, instead of trying to pick the peak in yields. Especially during periods of elevated volatility, investors should take a long-term view of financial markets in order to cut through the noises and prepare for the opportunities that may lie ahead.