Despite the potential for geopolitical and economic uncertainty, there are still ample opportunities to be uncovered across Asia’s local-currency bond market.
Global central banks in 2024 will need to successfully manage the transition from a monetary policy stance aimed at limiting inflation to one that reduces recessionary risks and delivers a soft landing with an economy that is neither too hot nor too cold.
In Asia, the picture is more fragmented, with some markets slightly ahead of the US Federal Reserve (Fed) in terms of their monetary policy cycle, given they are already pausing their interest rate hikes or starting to reduce borrowing costs.
Our base case is that central banks globally should reduce interest rates at a faster-than-expected pace. The US economy was remarkably resilient in 2023 despite elevated borrowing costs. However, some analysts believe that the full impact of higher rates on businesses and consumers has yet to filter through. If the US economy deteriorates too rapidly, the Fed may have to cut rates quite aggressively.
We expect Asian markets dominated by cyclical companies or industries will be more sensitive to any softness in global economic growth. In unison, weaker global demand for goods will weigh on economies that are more dependent on export orders.
For instance, India is less exposed to global trade as it has a large and growing domestic market for goods and services. India is expected to present opportunities in the coming years, given its robust economic growth, well-diversified economy, and lack of reliance on the vagaries of a particular sector.
In contrast, a single security accounts for more than 30% of South Korea and Taiwan’s respective weightings in the Emerging Markets (EM) ex-China index.
As we look ahead to 2024, there are several potential fracture points. Elections in Taiwan and the US presidential election later in the year could prove disruptive to trade flows and investor confidence. The war between Ukraine and Russia may trigger future upticks in energy prices and foodstuffs, while the Israel-Hamas conflict has the potential to spill over into the wider region.
These possible flashpoints could risk stimulating inflation in the face of low growth, delivering pulses that would derail the disinflationary trajectory of the global economy.
Asian markets with domestically produced energy supplies that can be used or traded for other energy products should weather price shocks more easily than those dependent on fuel imports.
Some growth areas of China’s economy, like technological independence and electrification, are being actively targeted for growth by the government. Indeed, recent US-China trade sanctions in relation to semiconductor chip manufacturing indicate that China is likely to increase its efforts to develop its domestic chip manufacturing capabilities, benefitting domestic companies operating in the tech sector.
Most Asian markets have avoided sudden plunges in currency values during the past few years. This may be partly attributed to maturing and improved regulatory systems alongside good central bank management. Throughout 2023, most regional currencies managed to maintain their value against the US dollar. However, this relative stability is unlikely to extend into 2024 amid the potential for foreign exchange and oil price volatility.
One potentially favourable outcome from the relative stability of most Asian currencies is that it makes local-currency bonds more attractive to foreign investors because of the reduced perceived risk.
As mentioned, monetary policy across Asia has become disconnected from that of the Fed. As a result, the difference between US Treasury yields and those of EM local-currency (LC) bonds is at its lowest level in 15 years.
Furthermore, the strength of the US dollar produces challenges affecting EM inflationary trends and currency returns. That said, certain names in the EMD LC Index have seen real yields turn positive, albeit lower than those US Treasuries offer.
In 2023, we also saw the announcement of India’s impending inclusion in the JPM GBI-EM Global Diversified Index. This move offers investors a new source of diversification and exposure to India’s growth story.
The potential for increased geopolitical tensions and any associated spikes in energy prices does mean some caution is warranted in 2024. However, if a positive diplomatic resolution could be achieved in the Ukraine-Russia conflict, this could boost investor confidence and ease global commodity supply issues.
Should the US and global economy achieve a relatively measured and soft landing, we could expect global trade to remain firm enough to support continued growth in export-exposed industries across Asia. While clouds remain, there will likely be pockets of opportunities for Asian bond investors throughout this multi-faceted region.