Asian bonds rose in January as investors reacted positively to easing inflation, the anticipated boost from China’s reopening and hopes that the global economy would avoid recession.
SSGA Fixed Income Portfolio Strategists
January saw Asia bond markets rally for the third consecutive month, with the Markit iBoxx ABF Pan-Asia Index returning +4.43% on an unhedged basis in United States dollar (USD) terms and +1.73% on a USD hedged basis. The optimistic tone came amid steadily decreasing inflationary pressures, which investors hope will prompt the end of US Federal Reserve (Fed) interest-rate hikes in the second quarter of 2023. The market was also buoyed by the increased possibility of a soft landing for the global economy, positive surprises in the European Union’s growth outlook, and the tailwinds from China’s reopening.
|Market||Local Currency Bond Return||FX Return||Return (in USD)|
Philippine (+7.08%) assets have enjoyed strong performance in recent months. In particular, the peso rose on the back of USD weakness and large interest-rate hikes by the Bangko Sentral ng Pilipinas (BSP) that matched those delivered by the Fed. However, consumer inflation has been surprisingly high, rising by 8.7% year on year in January from 8.1% in December. This breached the BSP’s forecast range of 7.5%-8.3%. Market participants believe that inflation will not return to the central bank’s target zone until the second half of 2023 and, as such, the possibility that February’s interest-rate hike will exceed 25 basis points (bps) has increased.
Thailand’s (+6.96%) local-currency bonds and the baht continued to recover in January. The easing of COVID restrictions in China has prompted a rise in visitor numbers, which aided a broad-based recovery in Thailand’s labor market. Both headline and core inflation slowed in January to 5.02% and 3.04% year on year, respectively. In a unanimous decision, the Bank of Thailand hiked its policy rate by 25 bps to 1.5% in January. The central bank also adopted a hawkish tone, with market participants expecting a further 25 bp hike at the March policy meeting, taking interest rates to 1.75% – this is despite soft inflation. However, the Bank of Thailand will want to avoid a scenario where prices rise because supply is unable to meet demand as tourism recovers.
Korea (6.42%) saw positive returns amid improving economic sentiment and China’s reopening process, which is expected to benefit regional export-reliant economies like Korea. Furthermore, foreign investors are also likely to return as attitudes towards emerging markets improve. The Bank of Korea (BoK) delivered a 25 bp interest-rate hike at its January policy meeting – possibly marking the end of rate rises for now. With growth slowing and consumer inflation expected to slip below 5% by March, it is predicted that the BoK will shift its focus from inflation to balancing growth and financial stability.
Malaysia (+5.97%) performed well, too, as the Bank Negara Malaysia surprised investors by maintaining interest rates at 2.75%. The market had predicted a further 25 bp hike. Headline inflation had peaked in Q3 2022 and is expected to moderate but remain elevated into 2023. The central bank thinks that growth for 2022 will exceed its 6.5%-7% target but said that softer growth is anticipated in 2023 given the global slowdown.
Indonesia (+5.25%) was boosted by a rise in the value of the rupiah, which was driven by the positive market tone and Bank of Indonesia’s direct intervention in the foreign- exchange market. Meanwhile, in January, foreign-investor purchases of Indonesian government bonds were the strongest in years, with holdings up by IDR49.7 trillion (Source: Barclays). Also, the market was surprised when headline inflation moderated to 5.28% year on year. This should enable investors to expect no further rate hikes in 2023.
In China (+2.86%), the yuan's value has risen by 3% since the start of the year as the economy reopened. In the first half of January alone, net overseas investment in China's stocks and bonds hit US$12.6 billion, with market participants believing that the economic recovery could be a major hedge against any global downturn. In other developments, the International Monetary Fund (IMF) lifted its 2023 growth forecast for China to 5.2% from a previous prediction of 4.4%.
Singapore (2.22%) enjoyed currency strength in January, with the Singapore dollar touching a five-year high, helped by rising expectations that the Monetary Authority of Singapore (MAS) would refrain from further policy tightening this year: MAS adjusted its foreign-exchange-based monetary policy four times in 2022 to fight rampant inflationary pressures. The market tone was also helped by China’s reopening, which should support Singapore's exports, as well as a reduction in domestic economic risk.
Hong Kong (+1.68%) bonds rose in January on expectations that the current cycle of rising interest rates could be near an end. The Hong Kong Monetary Authority (HKMA) is expected to hike its base rate by 25 bps to 5% at the start of February, following a Fed rate hike of the same margin. Also, border reopening with mainland China is predicted to boost 2023 growth, bolster consumer sentiment, underpin the services sector, and support trade, albeit gradually. Prior to the pandemic, tourists accounted for around 30%-40% of retail sales in Hong Kong, with visitors from mainland China representing about 80% of this figure.
Source: State Street Global Advisors for commentary, Bloomberg Finance L.P. for economic data, IHS Markit for Markit iBoxx ABF Pan-Asia Index data, and return data showing in the performance table, as of 31 January 2023.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
Past performance is not a reliable indicator of future performance.
Diversification does not ensure a profit or guarantee against loss.
Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Projected characteristics are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.
Assets may be considered "safe havens" based on investor perception that an asset's value will hold steady or climb even as the value of other investments drops during times of economic stress. Perceived safe-haven assets are not guaranteed to maintain value at any time.
The views expressed in this article are the views of SSGA Fixed Income Portfolio Strategists through the period ended 31 January 2023 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This article is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.