Flat Bond Returns Mask an Injection of Optimism in China
SSGA Fixed Income Portfolio Strategists
February 22, 2020
Asian bonds saw modest negative returns in January. The Markit iBoxx ABF Pan-Asia Index declined by -0.68%, on an unhedged basis, in US dollar (USD) terms, down -0.37% on a USD-hedged basis. China's bond market was the key outperformer, buoyed by the strength of the renminbi. In contrast, South Korea's struggling won resulted in its bond markets returning the worst monthly regional performance.
Renminbi Shines on Export Demand and Industrial Production
China was a significant positive contributor over January, returning 1.18%, thanks primarily to foreign exchange (FX) performance. The China renminbi continued to strengthen in January, on the back of sustained improvement in manufacturing sectors, supported by exports, and industrial production growth, which was driven by IT-related sectors. The Lunar New Year disruption to production and exports is expected to be smaller than usual, given that the authorities and companies urged people not to travel back to their hometowns over the holiday period. Despite positive developments, some challenges remain. Notably, the markets' wariness about a new outbreak of COVID-19 in China's northern provinces and the ongoing withdrawal of liquidity by the People's Bank of China.
Inflation Puts a Halt to Easing
In the Philippines, bonds returned +0.24% overall. The local-currency component provided +0.35%, which was partially offset by a -0.11% fall in the FX component. Hopes for further easing ended as headline inflation jumped to 4.2% year on year – this is the highest rate since January 2019, breaching the upper band of the target range of 2–4% set by the Bangko Sentral ng Pilipinas (BSP). It appears market participants expect the BSP to avoid further intervention over the medium term.
Fiscal Caution and Economic Stagnation
Bond markets in Hong Kong languished in January, returning -0.11% over the month. Consumer sentiment, the labour market and service exports remained weak, as inbound tourism remained at a standstill. Consequently, the local-currency bond component slipped -0.10%, and FX was almost flat. Despite ample fiscal reserves, Hong Kong's government appears cautious over its fiscal position. This deliberate approach is most likely underpinned by concerns about buffering unexpected shocks, which is unsurprising considering the events of the past 12 months.
Vaccination Speed Crucial to Tourism Recovery
Thailand's bond market returned -0.18%, with the FX component detracting -0.08%. Headline Consumer Price Index continued to decline in January, as food prices eased further. However, a slow vaccination drive in 2021 is likely to delay any significant recovery in tourism, a key contributor to gross domestic product (GDP), in the near term. Market participants expect the Bank of Thailand to keep its policy rate steady at an all-time low of 0.50% in the medium term.
Limited Fiscal and Monetary Wiggle Room as Cases Surge
A selloff in local rates contributed (-0.86%) to Indonesia's bond market returning -0.72% over January. Unlike its regional peers, Indonesia managed to contain its first wave of infections. However, subsequent outbreaks have been less well managed, and Indonesia is now struggling to quell a resurgence in COVID-19. In this context, the scope for further policy rate cuts in 2021 is limited, with any action highly dependent on the rupiah's stability. Fiscal support looks likely to wane too, as the government has budgeted a smaller increase in expenditure.
Malaysia's Central Bank Forecasts Growth Improvements from the Second Quarter
Malaysian bonds returned -1.08%, with both the local-rates component (-0.21%) and FX (-0.88%) detracting. At its January meeting, Bank Negara Malaysia kept its policy rate unchanged at 1.75%, announcing that banks' flexibility to use government paper to meet the 2% statutory-reserves requirement will be extended until the end of the year. Even though targeted containment measures have intensified, the central bank expects growth to improve from the second quarter onwards, driven by a global recovery, continued support from policy measures and higher oil production. Morale is also likely to be boosted by the expected rollout of vaccines.
Encouraging Vaccination Prospects may not Shield Singapore Bonds from Global Sentiment
In line with the risk-off sentiment experienced across markets in January, Singapore’s bonds were down -1.85% over the month in USD terms. Singapore is expected to be one of the first in the region to achieve widespread vaccination of its population – most likely by the third quarter of 2021. Fiscal support, which saw the deficit at -15.8% of GDP last year, is expected to be gradually tapered, but the deficit for the next financial year looks set to remain large by historical standards.
The Won Weighs on South Korean Bonds
South Korea's bond market was down by -3.10% over January, with FX a significant laggard. The South Korean won was the worst performer (-2.9%). The currency suffered a volatile start to the year. Its performance hinged on portfolio investment flow trends, notably a sharp increase in the appetite for foreign equities among South Korean investors.
Source: SSGA, Bloomberg Finance L.P., Barclays, iBoxx. As of 31 January 2021.
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 guarantee of future results.
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.
The views expressed in this advertisement are the views of State Street Global Advisors Fixed Income team through the period ended 31 January 2021 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.
The ABF Pan Asia Bond Index Fund (the 'PAIF') is an authorized unit trust in Hong Kong and Singapore only. Authorization does not imply official recommendation. Nothing contained here constitutes investment advice or should be relied on as such. Past performance of PAIF is not necessarily indicative of its future performance. Distributions from PAIF are contingent on dividends paid on underlying investments of PAIF and are not guaranteed. Listing of PAIF on the Hong Kong Stock Exchange and the Tokyo Stock Exchange does not guarantee a liquid market for the units and PAIF may be delisted from the Hong Kong Stock Exchange and/or the Tokyo Stock Exchange. Investors should read the PAIF's prospectus including the risk factors. The Prospectus for PAIF is available and may be obtained from State Street Global Advisors Singapore Limited or can be downloaded from www.abf-paif.com*.
All the information contained in this website is from SSGA and as of date indicated unless otherwise noted. 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. This website and the information contained herein may not be distributed and published in jurisdictions in which such distribution and publication is not permitted.
All forms of investment carry risk, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
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.
Securities lending programs and the subsequent reinvestment of the posted collateral are subject to a number of risks, including the risk that the value of the investments held in the collateral may decline in value and may at any point be worth less than the original cost of that investment.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, 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.
Diversification does not ensure a profit or guarantee against loss.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. Frequent trading of ETF's could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
The Markit iBoxx ABF Pan-Asia Index referenced herein is the property of Markit Indices Limited and is used under license. The PAIF is not sponsored, endorsed, or promoted by Markit Indices Limited or any of its members.
State Street Global Advisors Singapore Limited: Hong Kong address: 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone: +852 2103-0288. Facsimile: +852 2103-0200.