Skip to main content
Back

Asian Fixed Income

Asian fixed income delivered strong returns in 2019, with gains in both the investment-grade and high-yield credit segments. In this 2020 outlook, Endre Pedersen, Chief Investment Officer, Fixed Income (Asia ex-Japan) outlines the opportunities he sees in the interest rates, credits and currency segment of the Asian fixed income market. 

A strong 2019 due to favourable macro factors

At the start of 2019, our annual outlook identified two key macro drivers for the asset class: 1) Federal Reserve monetary policy; 2) Sino-US trade negotiations.

  1. Federal Reserve policy: US Treasury yields took a volatile ride in 2019, with 10-year yields at one point declining by more than 130 basis points, compared with the start of the year1,  as the US Federal Reserve (the Fed) shifted from monetary tightening to easing. In Asia, we saw accommodative monetary policy that was in lockstep with the Fed. Investors’ search for yield, coupled with an increasing amount of negative-yielding bonds in developed markets, boosted regional capital inflows. 
  2. Sino-US trade relations: See-saw Sino-US trade talks continued to impact investor sentiment and global growth prospects in 2019. We are carefully watching their progress into 2020, and believe this factor is likely to have less impact on high-quality Asian credits than equities. We believe that consumption-driven economies, such as Indonesia and India, should outperform export-reliant economies.

Overall, Asian fixed income posted strong gains in 2019 in this environment, with both the investment-grade and high-yield credit segments moving higher2.  

Continued robust fundamentals would drive outperformance amid uncertainty in 2020

Moving into 2020, we expect the fundamentals of Asia to remain intact. Asia is still forecast to have the fastest GDP growth of developed and emerging markets over the next few years, despite protracted global trade tensions3 . Equally important, Asia is one of the few regions that still boast the capacity for monetary and fiscal stimulus. Interest rates in Asian markets are generally higher than developed markets, which provide room for further and effective monetary-policy easing before a handoff to fiscal policy.

Overall, we believe Asian Fixed Income will continue to be a relative beneficiary of a favourable macro backdrop in 2020; however, a sluggish global economy means that investors should pay increased attention to risk.  We will outline the opportunities we see for Asian fixed income in three categories: 1) interest rates, 2) credits, and 3) currencies.


Interest rates: Continued global and regional monetary easing

We believe that the global monetary easing observed in 2019 may continue into 2020. The Fed’s monetary policy is likely to head in a stable-to-easing direction, while US Treasury yields may stay at low levels against a benign monetary policy backdrop. In general, we have a long bias (compared with 2019) in terms of portfolio duration (sensitivity to interest rates) to capture the potential benefits from a further softening of Treasury yields.  

Positive on local interest rate markets in China, Malaysia, and Indonesia  

The economic diversity of Asian economies, from exporters to domestic-driven demand, should provide robust investment opportunities for bond investors.

  • The trajectory of China’s economy will be watched closely in 2020. Our base case is for economic growth to stabilise and inflationary pressure (largely driven by food prices) to be temporary. The government is likely to implement targeted fiscal and monetary stimulus policies; however, as the country “onshores” its supply chain4, the stimulus is more likely to support domestic growth than regional economies.  From a longer-term perspective, we see 2020 as another potential milestone year for the development of China’s bond market. After the inclusion of Chinese bonds in the Bloomberg and J.P. Morgan indices in 2019, more global indices may consider their inclusion in 2020, which will lead to greater inflows. 

That said, investors will also be able to tap into a diverse array of economies outside China, particularly in Southeast Asia. We believe Asian local-currency bond markets of domestically driven economies stand out given their sound fundamentals and compelling real yields.

  • We continue to remain constructive on fixed-income opportunities in Indonesia, because of its compelling yields (10-year government bonds yields c. 7% level, rated “BBB” by international rating agencies) in a global context. Bond investors have already benefitted from the re-election of President Widodo and his ambitious reform agenda and Bank Indonesia (BI) cutting interest rates four times in 2019.  We believe that BI has further room for monetary easing in 2020 on the back of accommodative Federal Reserve monetary policy and moderate inflationary pressures.  
  • Malaysia is another market that we prefer in 2020. Malaysia was one of the less active regional markets in 2019, cutting interest rates only once earlier in the year. A combination of domestically driven growth and one of the lowest inflation levels in the region should translate into competitive real yields for investors. We also estimate the market has room to cut interest rates further in 2020.

Credits: opportunities in the Asian bond market

Due to the accommodative global macro environment, we expect demand for high-quality Asian credits to remain buoyant in 2020. Furthermore, we do not expect refinancing issues in the Asian investment-grade space, which could support a tighter credit spreads trend in 2020. Despite the negative sentiment surrounding the US-China trade tariffs, Chinese investment-grade credit spreads did not significantly widen in 2019, as the country’s state-owned enterprises (e.g. infrastructure and utility companies) and quasi-sovereign issuers (e.g. policy banks) are less-sensitive to trade negotiations. Overall, we prefer the credits of strategically important state-owned enterprises (SOEs) and select local government financing vehicles (LGFVs), which stand to benefit from continued government support via lending and fiscal stimulus. Examples include toll-road operators, railway operators, or companies involved in strategic projects at the national level. 

We are constructive on Indian credit from a fundamental perspective, but believe it is less attractive from a valuation point of view. India’s economy progressively slowed in 2019, but inflation was generally contained for most of the year for the Reserve Bank of India to cut interest rate aggressively. However, a string of defaults in the non-banking financial companies’ sector has not only roiled credit markets but affected liquidity conditions despite accommodative monetary policy. Despite these challenges, we are encouraged by a recent Supreme Court ruling that confirmed that the claims of secured creditors are superior to that of unsecured creditors, a positive development for international investors6. For 2020, we may wait for more attractive entry points for Indian credit from a valuation perspective.

We remain constructive on the regional high-yield space in 2020, particularly with a short-dated bias.  Indeed, high yield should continue to present yield opportunities for investors but with marginally higher risks compared with 2019. These risks include a large proportion of high-yield issues coming due in 2020, as well as a potential marginal uptick in defaults, particularly for small-to-mid-size privately owned enterprises in China. Risks for marginal companies in China have arguably worsened, as the government undertakes a more targeted stimulus and liquidity conditions tightened for smaller financial institutions. As a result, robust credit research selection should ensure that investors are compensated with attractive risk-adjusted returns. For more details on our outlook for Asian Credit, please refer to the piece contributed by our Asian Credit Team.

Currencies

In 2020, we are closely monitoring exogenous factors, such as ongoing Sino-US trade negotiations, US elections and signs of global economic recovery that may drive Asian currency markets in binary directions. Hence, we are opting to maintain broad Asian bond exposures balanced between US-dollar Asian bonds and local-currency bonds in order to diversify currency risk. We suspect currencies of export-driven economies to have a more volatile profile, as most of the exogenous factors have binary outcomes on their economic growth and subsequently their currency. We are somewhat cautious on the Chinese renminbi versus the US dollar, given the prospect of trade-war-related rhetoric. We favour markets that offer attractive real yields and rely on strong domestic economic fundamentals. Whichever way exogenous events play out, fundamentals would support a more stable economic growth trajectory and currency. From that standpoint, we believe Indonesia’s rupiah would stand out relative to its regional peers.

Prepared for the era of sustainable and flexible Asian bond investing  

Manulife Investment Management is well-equipped with one of the largest credit research teams in Asia. Apart from the traditional research and financial analysis on every single issuer, our credit analysts work closely with our dedicated Environment, Social and Governance (ESG) research team to review ESG factors. In addition, a dedicated ESG taskforce for our Asian Fixed Income portfolios has been set up to track the progress of ESG integration. As such, our Asian bond strategies are ESG aware and consider ESG factors with a strengthened process to manage screening and quantify downside risks.  

Arguably, the Asian fixed income space is getting more diverse and complex, expanding to 17 markets and 14 sectors8. This means that an established team with local on-the-ground support is even more relevant than ever before. Manulife Investment Management is supported by more than 50 fixed income investment professionals located in 10 offices across Asia9. We also adopt a “go-anywhere” approach that invests flexibly from across the entire US$18 trillion Asian fixed income spectrum10. This “blended” Strategy allows us to capture the triumvirate benefits of mitigating event risk, diversification and maximum flexibility.

Endre Pederson, Chief Investment Officer, Fixed Income, Asia ex-Japan
  1. US Department of the Treasury, as of 2 December 2019. 10-year Treasury yielded 2.79% on 18 Jan 2019 versus 1.47% on 28 August 2019.
  2. JACI investment grade posted a 10.73% gain, while JACI high-yield posted a 11.58% gain up to 6 December 2019.
  3. International Monetary Fund World Economic Outlook, October 2019: Projected annual real GDP growth for Emerging and Developing Asia: 2020 (6%), 2024 (6%); Advanced Economies: 2020 (1.7%), 2020 (1.6%); Emerging and Developing Europe: 2020 (2.5%) and 2024 (2.5%);   Latin America and the Caribbean: 2020 (1.8%), 2024 (2.7%).
  4. Import substitution is the policy of substituting domestic suppliers for foreign importers to localize the supply chain.
  5. Source: Manulife Investment Management, Bloomberg. Sovereign ratings based on the median rating between S&P, Moody’s and Fitch, as of 30 September 2019. Inflation rate is represented by year-on-year change of consumer price index.
  6. Euromoney: “India reverses course on Essar Steel decision”, 15 November 2019. 
  7. JP Morgan, Bloomberg as of 29 November 2019. Past performance is not an indicative of future performance.
  8. JP Morgan Asia Credit Index, September 2019.
  9. Manulife Investment Management, as of 30 June 2019.
  10. Asia Development Bank, Manulife Investment Management, June 2019.

Disclaimers   

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management.

Manulife Investment Management

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than 150 years of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at www.manulifeam.com.

Australia: Hancock Natural Resource Group Australasia Pty Limited, Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area and United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority, Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland. Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Asset Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad (formerly known as Manulife Asset Management Services Berhad) 200801033087 (834424-U). Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G). Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. Thailand: Manulife Asset Management (Thailand) Company Limited. United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Hancock Capital Investment Management, LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited. 

Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

506239

The VHIS Office recently discovered a translation error in the Chinese version of the Schedule of Surgical Procedures of the Certified Plan Policy Template. In the fracture/dislocation section of the Surgical Schedule, “clavicle” on the 8th and 12th items was mistranslated as “scapula” and “scapula” on the 13th item was mistranslated as “clavicle”. Manulife has reviewed and revised the relevant product information of Manulife’s VHIS certified plans upon the VHIS Office’s request, and has revised the Chinese version of the certified plans’ policy provisions accordingly. The English version of the policy provisions is not affected. For any enquiries, please contact Manulife’s service hotline at 2108 1188.

View more

The VHIS Office recently discovered a translation error in the Chinese version of the Schedule of Surgical Procedures of the Certified Plan Policy Template. In the fracture/dislocation section of the Surgical Schedule, “clavicle” on the 8th and 12th items was mistranslated as “scapula” and “scapula” on the 13th item was mistranslated as “clavicle”. Manulife has reviewed and revised the relevant product information of Manulife’s VHIS certified plans upon the VHIS Office’s request, and has revised the Chinese version of the certified plans’ policy provisions accordingly. The English version of the policy provisions is not affected. For any enquiries, please contact Manulife’s service hotline at 2108 1188.

View more
Confirm