Perspective

Asia fixed income making a come back?


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.

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.