Asian Bonds Recover in November as Investors React Positively to Easing US Consumer Inflation, Dollar Weakness, and China’s COVID Reopening.
SSGA Fixed Income Portfolio Strategists
Asian bond markets enjoyed a sharp rally in November 2022, with the Markit iBoxx ABF Pan-Asia Index rising by +5.42% on an unhedged basis in United States dollar (USD) terms and +1.74% on a USD hedged basis. A surprise decrease in core US consumer inflation led to a rally in US Treasury yields, and the US dollar index (DXY) retreated from its highs. A faster-than-anticipated relaxation of COVID measures in China and increased flows into emerging markets (EM) provided additional support.
|Market||Local Currency Bond Return||FX Return||Return (in USD)|
Korea (+11.65%) saw a reversal of the underperformance seen in recent months on the back of improved global economic sentiment. Even if the ongoing rise in core inflation, led by a recovery in consumption, means the Bank of Korea has to continue hiking interest rates until it reaches a peak of close to 3.75%, investors expect Korea’s trade deficit to dissipate next year amid the reopening in China and a recovery in tech exports.
Thailand (+10.91%) also saw its local-currency bonds and the baht recover amid stronger risk sentiment. Even as Thailand's real GDP expanded by 4.5% year on year in the third quarter of 2022, it remains below pre-COVID levels, with most of the increase coming from foreign tourism improving from a low base level. Thailand does remain vulnerable to the global economic slowdown, given its large share of trade in goods and services. Despite core inflation remaining around 3.2% year on year, the Bank of Thailand signaled its intention to tighten monetary policy with measured and gradual rate hikes, given the weak recovery. At its November policy meeting, the central bank raised interest rates from 1% to 1.25%.
Malaysia (+8.04%) delivered a solid performance on the back of a stronger-than-expected third-quarter GDP reading of 14.2% year on year. This was aided by healthier investment growth, stable private consumption, a higher goods surplus, and smaller services deficit. Bank Negara Malaysia (BNM) now expects full-year growth to exceed the 6.5-7% range forecast by the finance ministry in its October budget. Market participants anticipate another 25-basis point interest-rate increase in January, followed by a likely pause to assess the effect of five continuous hikes on the economy. BNM should resume in the latter part of 2023 if economic growth remains robust.
Singapore (+5.4%) rose on the back of a decrease in both headline inflation (6.7% versus 7.5% previously) and core inflation (5.1% versus 5.3% previously). This led to expectations that the Monetary Authority of Singapore (MAS) would ease its aggressive moves on the foreign-exchange-oriented monetary policy front. The MAS growth forecasts for 2023 are within a range of 0.5-2.5%, and the body has ruled out a recession as its base case scenario. It also forecast that growth in 2022 would touch 3.5%.
In the Philippines (+3.49%), the peso rose again in November after weakening by almost -13.7% in the first nine months of 2022. Downside risks remain, though, as headline and core consumer inflation accelerated to 8% and 6.5% year on year in November – the highest since 2008. The Bangko Sentral ng Pilipinas (BSP) outlook remained hawkish, and market participants anticipate a 50-basis point rate hike in December, with further increases next year if inflation continues to rise. Third-quarter GDP growth was robust, coming in at 7.6% year on year and 2.9% quarter on quarter, amid a recovering domestic sector.
Indonesia (+2.49%). Despite the recent rally in Asian currencies, the Indonesian rupiah has been a notable exception, weakening by -0.9%. More positively, Indonesia’s local-currency bonds staged a bounce back. After assuming a dovish policy stance for much of the year, Bank Indonesia (BI) started hiking rates in August to maintain positive interest-rate differentials and attractive rupiah yields. However, the central bank’s moves have had a limited effect on containing debt outflows and rupiah weakness. BI left its growth forecasts unchanged at the upper end of 4.5-5.3% and marked down the end-2022 inflation forecasts, expecting headline inflation to move from 6.3% to 5.6% and core from 4.3% to 3.5%.
Hong Kong (+1.9%) bonds and the Hong Kong dollar saw a small positive return in November as US Federal Reserve (Fed) rate-hike expectations eased. The Hong Kong Monetary Authority has raised interest rates by six times this year, mirroring the Fed's increases. The Hong Kong dollar had traded at the weak end of its convertibility zone of 7.75-7.85 for most of the year before strengthening in November.
China (+1.03%) saw the renminbi make gains in November, ending eight straight months of declines, as USD weakness and reopening newsflow provided support. However, trade and high-frequency data, such as automobiles and home sales, remained soft. Given this weakness in activity and a disappointingly low credit expansion, the People’s Bank of China cut the amount banks must hold in reserve by 25 basis points in November, as it aims to reduce financing costs in the real economy.
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 30 November 2022.
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.
The views expressed in this article are the views of SSGA Fixed Income Portfolio Strategists through the period ended 30 November 2022 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.