PERSPECTIVE3-5 min to read

Watch: 2023 Asian Macro Outlook

While the mood has been unsurprisingly gloomy in 2022, Asian local currency bonds have shown resilience and have outperformed global bonds. Our experts are hopeful about 2023 as the rate-hike cycle globally appears to be nearing its peak. Our Head of Asian Macro, Julia Ho, shares more about the outlook for Asian currencies in the new year.

30/12/2022

Authors

Julia Ho
Head of Asian Macro, Fixed Income

What have been the key drivers over 2022?

The better macro fundamentals, especially fiscal, debt levels, external balances and most importantly the adherence to conventional monetary policies during the height of the Covid19 pandemic has resulted in a less inflationary environment in Asia compared to the rest of the world.

As a result, Asian local currency bonds have shown resilience and have outperformed global bonds so far this year. And this is against a backdrop of aggressive US Federal Reserve tightening and a strong US dollar.

What are the key themes expected to drive Asia markets in 2023?

While the mood has been unsurprisingly gloomy in 2022, we are more hopeful about 2023 because our view is that the rate-hike cycle globally is nearing its peak, the US dollar strength should reverse and fixed income valuations have cheapened significantly and it provides a good entry point for long term investors.

If the US Federal Reserve shifts to a less aggressive tightening pace and pivots to a pause, this could lead to some USD softness which benefits Asian bonds, especially in the local currency space.

What areas of the Asia market does the team see opportunities going into 2023 and why?

Zooming in on China, the anchor for Asia, we caution that adjustments to the zero-Covid policy will likely be gradual, and border re-opening is going to be a bumpy ride. We are optimistic that the slow normalisation of outbound tourism should help to constrain the deterioration of Balance of Payments and stabilise the Chinese currency.

This currency stability, along with muted inflationary pressures and a modest pace of economic recovery should bode well for Chinese government bonds going into 2023 as monetary policy can stay accommodative.

Elsewhere in Asia, we see value in the short end of the curves in South Korea and Singapore where the central banks are ahead of the game in rate hikes and should be nearing the end of the tightening cycle. In terms of currencies, apart from Chinese Yuan we also favour Singapore Dollar and Korean Won on valuation grounds, as well as Indonesian Rupiah as it stands to benefit from resilient commodity prices.

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Authors

Julia Ho
Head of Asian Macro, Fixed Income

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