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Wall of money finds its way to Asia
Astute Investors are generally optimistic about the next 12 months
Asset Benchmark Research 1 Aug 2016
Paula Chan
Manulife Asset Management
Asian local currency remains an attractive asset class to global investors due to the positive interest rate environment, relatively stronger economic growth as well as diversification benefits. These factors are expected to drive inflow to this region going forward. The potential of including Chinese government bonds into the global bond index could be one of the key drivers of the local currency bond market.
Eric Liu
Manulife Asset Management
There are two main reasons as to why I am still positive on the Asian local currency bond market. First of all, as growth continues to slow across the board in Asia we have been seeing most Asian central banks either starting or continuing their easing stance to loosen monetary policy, which is positive for the respective bond markets from a bond valuation perspective. Secondly, as we are seeing negative interest rates in other markets, investors from those regions are raising interest to markets with positive yield, stability and not needing to worry about rate hikes. The Asian local currency bond markets tick all these boxes. As we are seeing the US implementation of a gradual rate hike approach softening the broader dollar impact to emerging markets (EM) currency weakness should provide some comfort to investors as well.
Gregory Suen
HSBC Global Asset Management
It appears that the backdrop for Asian local currency bonds is much more favourable this year compared to 2015. Last year, currency was a significant detractor for the Asian local currency bond market in general amid a very strong USD. However, USD strength has reversed in the first half of 2016, which has led most Asian currencies to strengthen in 2016 to provide very meaningful positive returns. This trend could continue in the coming period as the expectation for the Federal Reserve (Fed) rate hike in the US has eased amid macro uncertainties and sluggishness in the global economy. At the same time, the inflation outlook is also supportive for the fixed income market generally. Inflation is benign globally and there are no significant inflation pressures in almost all Asian countries. This would also provide greater flexibility for Asian central banks in case they want to further loosen monetary policy, although aggressive central bank action is unlikely in the coming period given the already low interest rate environment.
Morgan Lau
BEA Union Investment Management
I think it’ll be a mixed bag in the next 12 months so it won’t be a simple answer covering all local rates and FX. I expect local rate bonds with carry (IDR, INR) to perform better on a total return basis than most other countries. The others like SGD will likely underperform given the macro backdrop.
Nirmal Gandhi
SBI Life Insurance
Indian bond yields are more likely to fall in next 12 months as improving fundamentals like current account deficit (CAD), fiscal deficit and benign inflation will support bonds. Weak growth in the rest of the world and US going slow on rate hikes will attract foreign flows into Indian rupee bonds.
Amit Tripathi
Reliance Nippon Life Asset Management
Most positive
The Indian rupee bond market is one of the few high carry markets with a very stable currency and much improved macro parameters. The growth momentum is improving, corporate balance sheets are incrementally looking better. The shift to a neutral liquidity stance, from a deficit liquidity stance by the Reserve Bank of India (RBI) is a game changer for bond yields. I expect a bull steepening of the yield curve.
Rahul Goswami
ICICI Prudential
Asset Management
Most positive
Fundamentals remaining strong with low CAD and a lower inflation outlook as well as a stable currency, we believe there is scope for the central bank to cut rates which the market is not pricing in as of now.
Suyash Choudhary
IDFC Asset Management
India has seen a remarkable reset lower in its consumer price index (CPI) trajectory which has helped contribute to a substantial 150 bps rally in local bonds over the past couple of years. This disinflation has been partly owing to cyclical factors like falling global commodity prices and a collapse in local rural wages. It has also been on account of prudent policy including lower agricultural administered prices, more efficient deployment of cereal supply buffers, and a conservative fiscal stance. We think that the cyclical contributors to disinflation have run their course. Whereas the structural measures, while keeping inflation broadly contained, are no longer contributing to incremental disinflation. Given this, and assuming that the RBI will continue to want to anchor CPI to 5% or below even under the new governor, we believe that the rate-cut cycle in India is largely over. If true, this would imply limited room for long-term yields to fall much further, pending new sources of disinflation. Having said that, we do expect shorter tenor yields (less than 10 years) to continue to drift lower, responding also to the new liquidity framework of the RBI.
Naveen Sharma
HDFC Standard Life Insurance
The Indian bond market is going to experience massive change in the liquidity framework. Post the global financial crisis, the Indian central bank was operating with a negative liquidity framework irrespective of the interest rate cycle (cut/hike). Liquidity infusion through open market operations and adherence to fiscal consolidation has changed demand/supply dynamics significantly for government bonds. Currently, the 10 year bond is trading 100 bps above the operating overnight rate. I expect this spread to compress significantly specially for off-the-run bonds. However, the appointment of new governor and his approach towards the liquidity framework and inflation targeting (4% CPI by 2017) would decide the future. 
Ezra Nazula
Aset Manajemen
Domestic macro fundamentals are supportive of the Indonesian rupiah bond market with stable inflation and a dovish Bank Indonesia leading the way for lower yields. Global risk-off events and the Fed rate hikes may continue to cause volatility, but will be short-lived and investors will look to fundamentals once again. Positive domestic sentiments such as the passing of the tax amnesty bill, plans to eliminate withholding tax for bonds and a potential S&P rating upgrade in the medium term will be key factors to look out for.
Anil Kumar
Asset Management
Most positive
Indonesia is having an easing interest rate cycle which will be very positive for the bond market. Low inflation, tax amnesty, less remaining supply, falling time deposit rate, and the elimination of bond coupon tax are among the positive factors for Indonesia’s bond market along with sustainable GDP growth at above 4.75%. From a local perspective, the bond market is rather fairly valued and has room to rally.
Angky Hendra
Batavia Prosperindo Aset Manajemen
Growth concerns will induce a favourable environment for the bond market (i.e. stimulus, decreasing interest rate).
Michael Chang
MCIS Insurance
Most positive
In the next 12 months, we expect the Malaysian ringgit bond market to perform positively and is likely to demonstrate its resilience again with the onset of Brexit. The ringgit bond market has been renowned for being defensive in nature and has exuded stability at every challenging market cycle vis-à-vis its peers.
The latest “Brexit” challenge will continue to reverberate across global markets and cast uncertainty, not limited to just the UK and Euro Area (EA) economies but even globally at large. The focus will likely be on the financial frictions and negative imprint on GDP which might potentially be two to five times larger than trade effects. Therefore the implications could see US headline GDP being lowered by 0.5% and the EA by 1% over the next 2 years. The IMF has already highlighted these concerns attributed to Brexit. In essence, the financial ramifications should dominate trade effects and spur a broad repricing of risk globally, amplifying downside risks which are already apparent. Going forward, most central banks will either outright ease or adopt a less restrictive monetary policy to ensure growth in their respective economies. The timing of the next Fed rate rise will now become even fuzzier post Brexit. Hence, for Malaysia, it is likely that Bank Negara Malaysia (BNM) would continue to adopt an accommodative monetary policy (currently at 3.25%) to support growth and to limit the negative ramifications from Brexit. This is good for ringgit bonds. Global investors will continue to favour Malaysia for being relatively higher yield and for its defensive market appeal.
Sean Ramsey Lee
Affin Hwang Asset Management
Global interest rates are expected to remain depressed for a prolonged period of time or at best on a more gradual rising path as opposed to expectations three years ago. Whilst domestically, BNM, faced with challenging growth figures compared to historical levels and with the lack of inflationary pressures, may opt to remain in an accommodative stance as well. This coupled with ample liquidity from yield-hungry investors and a slowdown in private debt securities primary issuances, will see continued buying interest should pockets of relative value appear. Thus keeping the local bond market well supported even in times of duress. Undoubtedly, there are many looming external events which will shake investor confidence on a shorter term basis, but the longer term trajectory will still be a positive one.
Jose Miguel B Liboro
ATR KimEng Asset Management
The recent implementation of the Term Deposit Facility (TDF) has pulled yields on shorter-tenor securities flat against the Interest Rate Corridor’s (IRC) ‘floor rate’ of 2.5%. While strong local fundamentals and abundant liquidity remain supportive, any adjustment upward in the TDF rates will be viewed as a signalling tool and will likely send front-end rates considerably higher. Given the current prevailing sentiment that global bond yields will remain ‘lower for longer’, longer-tenor securities offer more value. Risks to the outlook are an uptick in inflation that could prompt the Bangko Sentral ng Pilipinas (BSP) to raise policy rates sometime in the fourth quarter and an acceleration in the pace of rate normalization in the US. I expect volatility to persist in the short term as the local bond market remains sensitive to external global events.
Kathrina Dizon
Philam Life
Resilience is a word often attached to the Philippines as of late. Whether in terms of economic growth, disaster recovery, or financial markets, the Philippines has displayed strength and stability in all areas over the past six years. Given uncertainty amid a global setting of slow growth, negative interest rates, financial market volatility, unmeasurable Brexit impact and other geopolitical concerns, the Philippine economy will once again test its resilience over the next year. With the current interest rate environment, the peso bond market seems priced for low rates for the rest of the year buoyed by positive local economic fundamentals and domestic liquidity. Inflation remains muted with expectations that it will continue to print at the lower end of the BSP’s target this year. Meanwhile, economic growth, which exceeded expectations in the first quarter of 2016, is seen to moderate in the second half of 2016 after election spending subsides. The BSP’s implementation of an IRC in June has temporarily flooded the local market with cash and found its way to the local bond market. However, this will soon normalize as the BSP’s weekly term deposit auctions should gradually siphon off these displaced Special Deposit Account funds. Meanwhile, the new Duterte administration seems to be well received by both local and foreign investors. President Duterte’s 10-point economic agenda is mostly anchored on the previous administration’s economic reforms. Plans to accelerate infrastructure spending while allowing the debt-to-GDP ratio to increase from the current 2% target may be accompanied by an increase in the local debt supply. Though this bodes well for sustained economic growth, interest rate and supply risks may elevate beginning 2017. Expectations of a manageable inflation environment with oil price recovery not foreseen in the horizon should temper such risks. Aside from this, an increased domestic bond supply can probably be well absorbed by the liquid market. But the challenge is to manage an expansionary fiscal policy without straining economic buffers to probable external shocks.
Ivan Corcuera
Sun Life of Canada
Term premia in both money markets and in the bond yield curve are being eroded because of the liquidity in the system. Some parts of the curve however, still offer relative value.
Ang Chow-Yang
Schroder Investment Management
The global growth trajectory and domestic outlook favours safe duration. Financial repression is financing disruptive technology, which is deflationary. Global growth is not improving as companies recognize that financial repression only suppresses the cost of debt and not the cost of equity. Hence the lack of willingness to invest.
Cheong Wei-Ming
Eastspring Investments
With heightened uncertainty hanging over the global economy, it is expected that global monetary policies will remain very easy and the Fed rate normalization process will be delayed further with potentially no further hike from the Fed. Barring a global recession scenario, the wall of money will find its way to Asia where growth is relatively higher and macro fundamentals are better. In addition, various Asian markets still offer attractive yields.
Cynthia Peck
Tokio Marine Asset Management
Global yields have tumbled to an unprecedented level. Bond yields will continue to stay low on negative interest rates in Europe and Japan, the Fed’s perceived inability to hike on threatened slowing global growth and the potential of Asian central banks cutting rates to spur growth.
Roland Mieth
For selected countries in EM Asia, local currency government bond yields compensate well for the exposure to an on average investment grade credit rating.
In the cyclical horizon, while capital outflows remain a concern and a large CNY devaluation is a risk to local markets around Asia, recent policy actions and improved communication with the market – particularly out of China – may already be helping to stabilize growth. China retains sufficient tools to avoid a hard landing.
The expectation for a gradual upward drift in commodity prices will help relieve some of the acute pressures regional commodity exporters felt in recent years, even as importers continue to benefit from prices which remain relatively low compared to their averages post the global financial crisis.
A seemingly patient Fed – especially one that has now acknowledged the global backdrop as a factor in its decision-making – alongside additional easing measures from the ECB and BOJ should be supportive of rates in Asia.
Developments around Brexit will certainly add an easing bias to all central banks around the region as well. We expect further easing China later this year. Korea, Singapore, Taiwan, Thailand are also likely to ease further in the second half of 2016.
In the secular horizon, countries around Asia score more favourably than in other parts of the investment universe on a number of indicators including demographics, productivity gap, and potential growth. To realize this potential growth, more needs to be done on infrastructure development and structural reforms. Several countries in Asia are moving in the right direction.
The persistence of healthy levels of growth continue to underpin the long term investment thesis even as the pace of growth moderates.
In contrast to the levering of public balance sheets observed in developed countries since the financial crisis, sovereign balance sheets for countries around EM Asia have remained relatively clean, with only a slight uptick in recent years, particularly in Malaysia. Furthermore, in contrast to prior periods of stress, including the Asian financial crisis in the late 90s, most of this debt is local currency denominated; thus countries are less vulnerable in a scenario of capital outflows.  Furthermore, against their already relatively low external debt levels, countries in EM Asia have accumulated significant stocks of international reserves, providing them with a significant dry powder of “self-insurance”.
Ryan Peng
Mercuries Life Insurance
Some statistics in Taiwan have shown that the economy will underperform as compared to the past. For instance, Taiwan’s GDP is predicted to grow by 1.06% in 2016, according to the announcement by the government. Besides this, many statistics also reiterate this fact, such as export orders and cyclical indicators among others. For this reason, from the third quarter of 2015 to the first quarter of 2016, Taiwan’s central bank has cut the policy rate three times, by a total of 0.375%, to 1.50%. As a result of these factors, I anticipate that the Taiwan bond market will perform as a bull market in the year ahead.
Jeff Lee
Yuanta Commercial Bank
Subject to the impact of overall global weak demand and the coming frozen period of the relationship between Taiwan and China government, export-oriented Taiwan’s medium to long-term economic prospect remains weak. Under such a situation, the central bank of Taiwan is expected to maintain an accommodative monetary policy for quite a long time.
However, since interest rates are at relatively low levels now, and Taiwan’s central bank resists the possibility of a negative interest rate policy, the space for Taiwan bonds to fall further is limited and yield volatility will be lower than the historically average levels.
Our strategy on bond investment will tend toward yield curve transformation and profit of carry trade.
Wendy Wu
Taipei Fubon Commercial Bank
As the pace of the downward trajectory in short-term rates from the Taiwan central bank is coming to a close, further decline on these rates will be limited. Long-term rates are currently under pressure since the flow of insurance funds to the international bond markets continues. Moreover, there is an expectation that the reduction in interest rates will last until June this year; and that economic data could bounce back as a result of underperformance for the same period in 2015. If the short-term rate remains unchanged, and as investors have yield requirements, I am bearish on the Taiwan dollar bond market in the year ahead.
Chajchai Sarit-Apirak
Kasikorn Asset Management
Internal factors include low loan growth and the inflation rate, higher supplies of both government bonds and corporate debentures and no change of the policy rate. External factors include low interest rates and some net outflow from non-resident investors (but this is not a worry as the Bank of Thailand could manage this environment). In conclusion the yield curve will slightly adjust higher than the current level.
Tanandon Cholitkul
Kasikorn Asset Management
The expectation of heavy bond supply
for the next fiscal year and a turnaround in inflation will put negative pressure on the THB bond market. However, this impact should be limited due to factors such as fragile global growth, accommodative monetary policy, plenty of liquidity, and a more dovish Fed.
Yuttapon Wittayapanitchagorn
SCB Asset Management
Amid the current risk-off sentiment from Brexit, I think the Federal Open Market Committee inevitably has to raise the policy rate when inflation plays its role and they cannot run away from US fundamentals. This will be another year of low rate environment but next year may be another story. Since Thai bond yields have a high correlation with US treasury yields, I think Thai bond yields have a chance to go up from this current level.

Editor’s Note: These award winning individuals are presented in rank order. Their responses were gathered in June and July 2016. 


To see the full list of the most Astute Investors in Asian local currency bonds for 2016, please click here.

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