Outlook 2020: Asian multi-sector bonds
- We see a weaker US dollar, amid accommodative US monetary policy, providing support to Asian bonds
- China’s economy will continue to slow and will be supported by measured fiscal and monetary response by the authorities; but we certainly do not see growth collapsing
- We believe Asian local currency bonds are poised for attractive returns in 2020 particularly in higher-yielding markets like Indonesia and India
2019 has been a positive year for Asian bond markets despite worsening US-China trade relations; increased geopolitical risks – with protests in Hong Kong, parts of the Middle East and Latin America; Brexit; and weakening economic data globally.
Asian bond markets have also shown greater resilience to the strength of the US dollar in 2019, than was the case in 2018. The US Federal Reserve’s (Fed) about-turn from hawkish to dovish was clearly helpful for market sentiment toward Asian bond markets.
The Chinese yuan weakened and fell through the technically important “7 level” versus the US dollar in the summer. Weaker economic data resulted in Chinese authorities letting the Chinese yuan depreciate. The more export-oriented economies, such as Korea and Malaysia, saw their currencies suffer versus the US dollar. The currencies of more domestic oriented countries such as the Philippines peso and Indonesia rupiah made modest gains. Returns from Asian currencies were flat to the US dollar overall.
US dollar weakness to support Asian bonds
Looking ahead we see continued global monetary policy support, led by advanced economies. Potential fiscal stimulus in some parts of the eurozone and Asia should also help rebuild confidence and reduce the risk of a global recession.
The initial trade deal between China and the US should at least prevent any further worsening in trade relations, but it does not mean an end to the uncertainty. This should keep global bond yields on a downward trajectory – supporting bond prices – as investors remain cautious.
On balance we should see a weaker US dollar in 2020, which would foster a more constructive backdrop for Asian local currency bonds. The headwinds facing the US dollar are gradually building. The combination of a presidential election and the Fed's stated bias to keep monetary policy easy – the Fed’s chief concern still seemingly a prolonged period of below-target inflation – leaves less headroom for the US dollar to strengthen versus higher yielding currencies. Uncertainty around the US elections as well as lower US interest rates should drive investors to seek “safer” and higher-yielding markets outside the US.
The Fed is once more in quantitative easing mode, buying $60 billion of bonds for the next six months, well above the European Central Bank’s €20 billion, and this too could put downward pressure on the dollar.
China slower, but solid
China’s growth momentum is likely to remain weak due as policymakers maintain a more measured approach to fiscal and monetary support, to keep borrowing contained. A free fall of the Chinese economy is not expected, however, as infrastructure investment should pick up against a backdrop of a still resilient services sector. Moreover, consumer price inflation – which of late has been driven by food prices – is expected to fall in the first quarter of 2020. This gives the Chinese central bank more leeway to ease monetary policy. This should support continued positive performance of onshore (yuan-denominated) Chinese government bonds.
Higher-yield Asian bonds and currencies well placed
Higher yielding Asian local bond markets such as Indonesia and India should also benefit in 2020. A stable to weaker US dollar as well as accommodative global central bank monetary policies should prompt investors to seek yield and return. In addition, Asian currencies, especially the higher yielding Indonesian rupiah and Indian rupee, are poised to do well as their central banks should have more scope to ease monetary policies to support growth (or at least cushion the impact of global weakness).
All said, the base case for the US dollar being weaker should augur well for inflows into Asian assets and hence be broadly supportive of Asian currencies and bonds in 2020.
You can read and watch more from our 2020 outlook series here
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- V, W or L: what shape will the recovery take?
- What impact is Covid-19 having on global economies and markets?
- Our multi-asset investment views - March 2020
- Is the credit spread curve inversion a red flag?
- Johanna Kyrklund: is this the end of the beginning?