7
Foreword
Rethinking the macro landscape
Reframing globalisation
Redefining sustainability
Asian bonds Asian local currency bond yields exhibit good value at current levels and present an attractive entry point for investors looking to position themselves for the start of the rate cutting cycle. The Korean central bank may be the first Asian central bank to cut rates. Meanwhile, low beta markets such as Thailand and Malaysia are likely to be more resilient if bond volatility rises. Singapore government bonds stand out for their attractive yields compared to other AAA-rated sovereigns. Equally, SGD corporate bonds offer investors quality and relative stability given the SGD’s safe haven currency status.
economy. Food inflation may continue to be a concern for Asia in 2024 too, as climate change and supply disruptions affect agricultural output, especially that of rice. One country that would welcome more sustained inflation is Japan. The country’s labour market is tighter than it has been in many years, placing upward pressure on wages. More entrenched inflation in Japan would allow companies to raise prices and improve margins. The Bank of Japan will have room to unwind its yield curve control and negative interest rate policy. In our view, Japan has a once-in-a-generation opportunity to move out of its deflationary era, which would be positive for Japanese businesses and investors.
Asian IG corporate bonds’ high absolute yields may appeal to some investors. As we enter the late stage of the economic cycle, we are biased towards quality although HY credits with good fundamentals may offer selective opportunities. As valuations for longer-dated bonds have improved significantly, we look to moderately increase our duration within high quality bonds. Asian currencies are likely to trade defensively as they are caught in the cross currents of EUR, JPY, and CNY weakness. The CNY, one of the biggest drivers of Asian currencies, is weighed down by China’s weak economic growth and reduced investment flows. Higher yielding currencies such as the IDR are likely to be vulnerable to increased volatility or risk-off sentiment.
US bonds US Treasury yields are at multi-year highs across the curve, which makes US Treasuries look attractive over a 12-month horizon. They will likely regain their roles as effective diversifiers against equities, especially in a recessionary environment. Given our base case scenario of a recession in the US, we remain defensively positioned within the US credit space, favouring US Investment Grade (IG) over High Yield (HY) corporate bonds. While defaults have been contained within US HYs, corporate refinancing risks may be underpriced as the maturity wall swells in the next few years. The USD is expected to be supported by “higher for longer” interest rates and still wide interest rate differentials. The dollar’s counter-cyclical nature also tends to help it outperform during recessions.
Asian local currency bond yields exhibit good value at current levels and present an attractive entry point for investors.
KEY RISKS ---------------
There are several key elections in 2024, including the US Presidential election in November. Economic fundamentals will continue to drive markets in the first half of 2024 as it is still too early to assess the impact of the elections. Sentiment towards China is currently extremely bearish. If the Chinese government’s stimulus measures surprise on the upside, this could potentially have a very positive impact on how Chinese consumers feel and how investors view Chinese assets.
Emerging Market bonds Heightened geopolitical tensions in the Middle East should keep the region’s risk premium elevated. EM economies have held up relatively well with some EM central banks keen to ease rates, which should help support economic growth. The fiscal profiles in some parts of Emerging Europe may improve over the year. Given differing growth and inflation dynamics, bond opportunities in the region will vary. At the point of writing, we favour Asia as well as the LATAM countries where real rates are high.
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