There was a widespread belief that Asian policymakers were relatively slow to raise interest rates compared to their global rivals from emerging markets in general and Latin America in particular.
This pessimistic outlook caused emerging Asian bonds to lag their global counterparts in the second half of this year.
However, a decrease in inflationary pressures could serve as a springboard for happy change and bring some optimism in these difficult times of crisis.
Horrible inflationary pressures have begun to ease in many parts of the world, paving the way for an expected increase in interest rates. At the same time, the positioning of foreign investors can be considered quite weak, providing a plethora of opportunities for inflows to increase. Despite concerns about a rise in Covid cases, there are reasons to be optimistic about China’s economic rebound in 2023.
What are the expert ratings on Asian emerging market bonds?
According to Winson Phoon, head of fixed income research at Maybank Securities Pte in Singapore, Asian emerging market bonds should be six to 12 months ahead in 2023 after two tough years. Moving forward, he said there is now a better understanding of the topic of terminal federal funds. In addition, it is likely necessary for regional central banks to ease their tightening policies, in the hope that the trend in bond positioning can be positive.
The current picture of Asian bonds.
According to an index developed by the sources, emerging Asian bonds have cost dollar-based investors a 2.8% loss since early July. This compilation, compared to other regions, equates to a 0.4% reduction in the Middle East, Europe and Africa and a 1.6% increase in Latin America.
The reasons for the optimism about Asian emerging market bonds.
Inflation mitigation.
The fundamental reason for the confidence in the Asian context is the slowdown in inflation. Consumer price increases in many of the region’s largest economies, including China, Indonesia, Taiwan and Thailand, have remained below analysts’ estimates for at least three months. Perry Warjiyo, Governor of Bank Indonesia, said on November 17 that core inflation will peak early next year. On November 24, the Bank of Korea predicted inflation of 3.6% next year, compared to 3.7% in August.
According to Jon Harrison, managing director of macro strategy for emerging markets at macro forecasting firm TS Lombard, the two main local-currency debt warnings in emerging-market Asia are Indonesia and South Korea, where the inflation is under control.
Maximum rates.
The expectation of lower inflation is prompting central banks to suggest that the tightening cycle is nearing its end, implying that the peak would be weaker in Asia than in other emerging countries.
Thailand’s policy rate remains below pre-pandemic levels, while Malaysia’s is back to its March 2020 level. Both of these countries, along with Indonesia and India, have standards below 0.9 standard deviation from their five-year average. A comparable indicator is greater than 2 for Brazil, Mexico and the Czech Republic, while it is greater than or equal to 3 for Colombia, Hungary and Chile.
Capital flows.
There is also an opportunity for foreign capital to return, as foreign investors have reduced their bond positions around the world this year, with net capital outflows from China, Indonesia, Malaysia and India. According to a report released this month, DBS Bank Ltd. projects that Indonesia, which is generally seen as a barometer for the region, would garner bond inflows ranging from $3 billion to $7 billion in 2023. This follows net outflows of $9.6 billion this year, the highest of Bloomberg’s statistics dating back to 2010.
“Indonesian bonds could benefit from increased portfolio flows in a more risk-friendly climate,” noted Rajeev De Mello, global macro portfolio manager at GAMA Asset Management in Geneva.
Pickups from China.
The final driver likely to boost Asian bonds is China’s long-awaited reopening when the country takes more steps to ease its Covid Zero restrictions. Authorities have already taken steps in this direction, saying earlier this month that passengers will be forced to spend less time in quarantine.
The preparatory work for a real reopening of China has already begun, so “Asia’s economic cycle remains very much alive”, according to chief Asia-Pacific chief Min Lan Tan at the investment office. UBS Global Wealth Management in Singapore. Simultaneously, a spike in rallies over Covid limitations adds to the uncertainty. Protests have erupted across China in recent days, with residents taking to the streets and campuses to express their rage against local leaders and the Communist Party.
Concluding factors to remember this week.
- China will release its November manufacturing PMI as investors expect to watch the impact of the recent surge in Covid cases.
- The Bank of Thailand is expected to raise its key rate by 25 basis points, marking the third consecutive hike.
- This week’s inflation statistics from Indonesia, South Korea and Poland will be analyzed for signs of a spike in price increases.
- Poland, Brazil, Czech Republic, Turkey, Taiwan, India and South Korea will all release Q3 GDP figures.
Edited by Prakriti Arora
