Asian bond markets were boosted by easing concerns about the Delta-variant and renewed confidence in the global recovery.
SSGA Fixed Income Portfolio Strategists
Overall, Asian bond markets registered a positive return in August 2021, with the Markit iBoxx ABF Pan-Asia Index gaining +0.52% on an unhedged basis in United States dollar (USD) terms. Meanwhile, the Index was down by -0.10% on a USD hedged basis. Delta-variant concerns eased during the month, with slowing hospitalization and case rates in many territories. Consequently, there was a return of recovery-focused trades in emerging markets. This was particularly apparent in the last week of August when those regional currencies most closely linked to broad changes in the economic climate or movements in commodity prices outperformed.
Looser COVID measures boost Indonesia’s economy
Indonesia was the best performing market in August, with a return of +2.6%. Both the rates and foreign exchange (FX) components contributed equally. Year-on-year gross domestic product (GDP) growth for the second quarter of 2021 returned to positive territory (7.1%), as social-distancing measures eased and domestic demand improved. At its August policy meeting, Bank Indonesia left the short-term lending rate unchanged at 3.5%, in line with market expectations. The central bank also downplayed the impact of a talked-about reduction in the US Federal Reserve’s economic-support program. Furthermore, it underlined a commitment to helping the recovery by keeping the exchange rate stable amid low consumer inflation.
Thailand supported by more robust manufacturing output
Thailand was up by 2%, with baht (+1.8%) strengthening a significant factor in the market's rise. The currency recovered from weakness in July on expectations that many COVID-related restrictions could be relaxed in September: the seven-day average of new cases has decreased since 18 August. Meanwhile, data showed that the economy ended five straight quarters of contraction with year-on-year growth of 7.5% in the second quarter of 2021. And even as tourist arrivals remain negligible, manufacturing output has improved, growing by 2.4% quarter on quarter (seasonally adjusted).
Political change in Malaysia may affect the fiscal deficit
Malaysia gained +1.8%, which was entirely driven by rupiah strength. The currency climbed to its highest level in more than two months amid heavy flows into the stock market. Headlines were dominated by the resignation of the Prime Minister and his cabinet, as they no longer commanded a parliamentary majority. The subsequent political noise and uncertainty are expected to have a negative impact on Malaysia’s fiscal deficit (where spending exceeds income), as the next government is unlikely to risk the economic recovery for the sake of narrowing the deficit.
Further quarantine measures in Manila
Across in the Philippines, the market rose by +0.3%, with peso strengthening (+0.9%) offsetting weakness in local currency bonds (-0.6%). Bangko Sentral ng Pilipinas (BSP) kept its overnight borrowing rate unchanged at 2% in August, noting that the reimposition of enhanced quarantine measures in Manila and Laguna pose risks to the ongoing recovery. BSP also increased its inflation forecast for 2021 to 4.1%, which slightly exceeds its 2%–4% target range.
Services and manufacturing weaken in China
China was up by +0.2%, driven by its local currency bonds. The FX element remained flat. Manufacturing output declined for the fifth straight month in August, with weaker demand from heavy or polluting industries, such as crude oil and coal, reflecting the government efforts to achieve its carbon-neutral goals. Also, strict, zero-tolerance COVID lockdowns weighed on the services sector.
Reduced government support affects Singapore
Singapore bonds lost -0.1% over the month, with the local currency (-0.8%) and FX components (+0.7%) moving in opposite directions. Even as increasing mobility and a high vaccination rate in Singapore are positives, the negative outlook for global bonds, together with the scaling back of emergency-support measures, has affected fixed-income prices.
Healthier economic growth forecast in Hong Kong
Hong Kong saw a modestly negative return of -0.4% over the month, with local currency bonds (-0.3%) hampering the market’s rise. Hong Kong’s economic growth forecast range for 2021 was raised to 5.5%–6.5% from the previous 3.5%–5.5%, as exports, fixed-asset investments, and consumer spending continue to expand.
Foreigners reduce their exposure to Korea
Korea returned -0.8% over the month. This was entirely due to the FX element. The depreciation of Korea’s currency, the won, was partly a result of foreign investors selling their equity holdings. However, there was also a knock-on effect from China’s modest economic slowdown, as it is a net importer of Korean goods.
Source: State Street Global Advisors, Bloomberg Finance L.P., Barclays, iBoxx, as of 31 August 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 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.
The views expressed in this article are the views of SSGA Fixed Income Portfolio Strategists through the period ended 31 August 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.
This article is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission.