FUNDS are returning to Asia after the knee-jerk withdrawal following Donald Trump’s election as US president, and declining volatility means debt in India, Indonesia and South Korea are attractive, money managers say.
BlackRock Inc, Aberdeen Asset Management Plc and Aviva Investors share their views on picks in Asia, the impact of President Trump, the outlook for Asian central banks and the US dollar:
> Jokowi’s reforms
Indonesian President Joko Widodo is cutting red tape and boosting revenue with a tax amnesty, brightening the outlook for South-East Asia’s biggest economy. He has laid out an infrastructure blueprint to build ports, roads and railways to spur growth to 7% by the end of his term.
These reforms provide a “nice tilt to the right direction but nothing too aggressive that it completely shatters the fiscal balance and current-account balance which keeps things positive for the currency,” says Leong Lin-Jing, a Singapore-based investment manager at Aberdeen Asset Management, which oversaw US$374bil as of end-2016.
BlackRock ranks Indonesia debt as its top pick in Asia after India, according to Neeraj Seth, head of Asia credit at the firm, which oversees US$5.1 trillion. He also likes the short-end of the curve for South Korean bonds.
Rupiah-denominated government debt delivered a return of 3.3% in the past three months, the best performance in emerging Asia.
The yield on dollar bonds issued by Indonesia companies has fallen below those of Chinese firms for the first time since June 2015. They are likely to stay lower because of Indonesia’s positive outlook, political stability and “relatively strong” currency, said Lakshmanan R, senior research analyst at CreditSights Singapore LLC.
> Funds return
“Even though there’s a lot of uncertainty, volatility has been really low,” says Mary Nicola, an investment strategist with Aviva Investors in Singapore. “In this environment, it still bodes well for risk and carry in general. We still like Indonesia bonds, there’s fundamental support to it as well. We still like India, especially the currency. The rupee has been less volatile than some of the other currencies and it’s probably a bit more insulated from Trump’s protectionist rhetoric.”
Funds will continue to return to Asia, said BlackRock’s Seth, calling the withdrawal of money after Trump’s election victory a “knee-jerk reaction”.
“You’ll see the flow picture continuing. It might not and probably will not be the same as the uptick we saw post-Brexit. It was a different scenario where you had a lot of investors going into the Brexit referendum very light on risk, very light on emerging market (EM) exposure or Asia exposure,” Seth says.
“There has been some changes in terms of investor positioning but nevertheless, given the broader valuation differences in developed markets versus EMs, and given the better growth potential in Asia compared to the rest of the EMs, I think the inflows will continue.”
It may also be too early to assess the impact of potential protectionist US policies on Asian bonds, according to Seth. “There will be some re-negotiations on the trade pact levels. At the same time, I don’t think you are looking at some big disruption from a trade flow perspective.”
The dollar is expected to sustain its gains as the Federal Reserve proceeds with more tightening, said Aviva’s Nicola. “If the Fed’s going to continue to hike – we expect three hikes this year – but if the is still easing and BOJ is also not going to taper anytime soon then the rate differential still works in favour of the dollar.”
In Asia, most central banks are at the end of their monetary-easing cycle, BlackRock said. China has started tightening, and there may be cases to be made for the Philippines and Malaysia to also consider rate hikes, says Seth. “For Malaysia, we think that policy will remain unchanged this year but a case could be made for rate hikes given the weak currency, rising inflation and improving economic outlook in line with commodity trends,” he says.
Indonesia may be the exception, even after cutting interest rates six times last year, according to Aberdeen’s Leong.
“Should things stabilise on the global front, the bias is still for a cut in the policy rate,” says Leong. “Growth is still on the weak side, commodity prices are not really climbing and food prices should stabilise given the improving monsoon.” – Bloomberg