Market regime shift and Asia fixed income

This article was syndicated by Endowus in partnership with Schroders.

Why we remain optimistic on Asia bonds

2022 was an exceptionally tough year with rising inflation, financial tightening, and geopolitical risks. Despite these headwinds, Asian bonds displayed great resilience and outperformed most other major bond markets.

Bond market total return in 2022

Looking ahead, we are optimistic about this asset class for a few reasons. 

Firstly, the rate-hike cycle globally is nearing its peak. Secondly, the growth differential between the US and the rest of the world will further narrow. Lastly, we anticipate that the strength of the US dollar will continue to reverse, which will allow Asian currencies to find a more stable footing.

Read more: Navigating a strong US dollar in Asia fixed income markets

What parts of the Asian bond market look attractive?

In the Asian sovereign space, we are constructive on countries where central banks were early hikers and real yields look attractive, such as Singapore, South Korea, and Indonesia. 

Meanwhile, Indian rates will likely underperform given the unfavourable demand-supply balance and expected weakness of the currency. 

Overall, we believe Asian local currency bonds have a lot to offer with both currency appreciation opportunities and diversification benefits.

Why we like Asian dollar credit

For Asian dollar credit, we think it’s an attractive opportunity for investors to earn income and take advantage of improving corporate fundamentals. We continue to prefer investment grade over high yield as it offers quality risk-adjusted income. 

Credit spreads have compressed in the past couple of months to reflect positive developments in China and improving risk sentiment globally. 

The valuation still looks fair to us, and we see pockets of opportunities in sectors such as financials, technology, quasi-sovereigns, and Macau gaming.

Read more: Where are we seeing opportunities in Asia credit?

How investors can best navigate the current market environment

We believe investors are entering a new market regime where monetary policies have normalised, liquidity is not as abundant as in the past decade, and higher volatility is the new norm.

It’s therefore critical for active bond managers to stay nimble and generate alpha by pulling multiple levers, be it interest rates, currencies, or credit spread. In this regard, we see plenty of opportunities in the Asian bond universe.

Read more: Asia fixed income making a comeback?

This article was originally published by Schroders on 23 Feb 2023.

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