Managers' views

Covid-19: Latest views on the Asian fixed income market

Roy Diao

Roy Diao

Head of Asian Fixed Income

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Global markets are tracking with volatility levels not seen since 2008. The escalation of Covid-19 into a pandemic and Saudi-Russia oil price tension happening at the same time, mean the global economies are impacted on both sides which dampens demand.

Liquidity challenge

There has been substantial re-pricing in securities and liquidity has become one of the biggest concerns. Although Asian credit is resilient compared to the US and the other Emerging Markets due to its lower exposure to commodities, it is not immune to the recent rounds of sales as investors might, at times, trade more on sentiment rather than fundamentals during market dislocations like this.

Today versus the Global Financial Crisis – Financial sector is stronger overall

Despite the market volatility, we do not expect the systemic risks in the banking system that we saw in the 2008 global financial crisis. The financial sector today is on a much stronger footing than before with more robust balance sheet and capital ratios. While default rates in Asia would undoubtedly increase considering the difficult business environments, and given the funding gaps of those corporates with weaker liquidity positions, we do not expect a widespread default in a scale anywhere close to what we saw in 2008. That said, as there is still high uncertainty on the duration and severity of Covid-19 and how long the oil price tension will persist, investors should be prepared for a period of weakness and volatility in the medium term.

Asian currencies continue to face depreciation pressure

We expect the Asian central banks to maintain an accommodative stance and step up their efforts on fiscal policy front to support economies. On Asian local rates, we overweight high-quality duration from countries such as Singapore and Korea given investors’ demand for risk-averse assets and expectation of monetary easing. With the expectation that the US dollar is likely to stay strong for some time given risk-averse sentiment and US dollar scarcity, we believe that Asian currencies, such as the Singapore dollar, the Malaysian ringgit, the Thai baht and the New Taiwan dollar, will continue to face depreciation pressure.

Reduce credit-beta and increase quality to avoid “fallen angel” risk

For Asian credit, we have been reducing overall credit market exposure (i.e. “beta”) and upgrading credit quality to ensure that our investments can ride through the market turmoil. It is also paramount to have sufficient liquidity. That said, as the market sometimes gets ahead of itself during dislocations, it is of equal importance to remain nimble and be ready to shift gears, capturing the opportunities with attractive valuations when they arise. Therefore, we favour corporate credits with an attractive risk/reward profile that are both fundamentally cheap and have the ability to navigate the credit cycle. We would also continue to focus on bottom-up selection in order to avoid those names with ”fallen angel“ risk or potentially downgrade pressure to a CCC credit rating.


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