13 March, 2020
Endre Pedersen, Chief Investment Officer Fixed Income, Asia ex-Japan
The steep decline in oil prices during the week of 9 March 2020 sent global markets sharply lower. However, Asia may emerge as a principal beneficiary of this trend, as many countries in the region are net oil importers. In this investment note, Endre Pedersen, Chief Investment Officer, Fixed Income, Asia (ex-Japan), explains why Asian fixed income may be well placed to withstand short-term market volatility and how to capture long-term opportunities for investors.
The recent sharp decline in oil prices, coupled with the ongoing risk-off market environment, introduced additional volatility and uncertainty to global and Asian financial markets.
During periods of heightened volatility, investors are unlikely to appreciate the contrast between the region’s “winners” and “losers” that come from lower oil prices. For example, on 9 March, the Korean won, and Indian rupee both weakened against the US dollar, despite South Korea and India being beneficiaries of oil-price weakness.
Similarly, Asian credits lack differentiation at this juncture, as most Asian credit spreads widened given the already thin market liquidity conditions. We believe that some of these dislocations are driven more by market sentiment than fundamentals.
In our view, the following markets will benefit or be hurt by lower oil prices.
Once markets stabilise, the sharp fall in US Treasury yields and increased Asian yield premiums (versus developed-market bonds) should be broadly supportive for Asian hard- and localcurrency bonds. Notably, the currencies of Asia’s net energy importers should outperform on a relative basis. In the medium term, with US Treasury yields lower and the spread of COVID-19 largely contained in Asia, liquidity conditions should normalise, and this will help to recover some of these price dislocations.
Furthermore, we think that high-quality Asian investment-grade (IG) credits, including most government-backed oil names, will continue to see strong support. However, gaming and commodity issuers in the private sector may face headwinds. Investors should be more selective in credit screening for these sectors.
Takeaways from China’s NPC Meeting & upcoming drivers for Greater China equity market
In addition to the recent breakthroughs in AI and humanoid robot development, we observe other positive catalysts that further support the region’s market.
Risk Diversification
There is no free lunch. But Risk Diversification comes close in investing. A diversified portfolio was shown to optimize returns with lower volatility in the long run.
Policy Normalisation in Japan: how high will the BoJ go?
The Bank of Japan has continued to raise interest rates in an effort to "normalize" monetary policy, presenting potential opportunities for discerning investors.
Takeaways from China’s NPC Meeting & upcoming drivers for Greater China equity market
In addition to the recent breakthroughs in AI and humanoid robot development, we observe other positive catalysts that further support the region’s market.
Policy Normalisation in Japan: how high will the BoJ go?
The Bank of Japan has continued to raise interest rates in an effort to "normalize" monetary policy, presenting potential opportunities for discerning investors.
Here come the tariffs: why it’s too soon to draw conclusions
The recent announcement of U.S. tariffs on key global trading partners grabbed plenty of headlines but until we get more details, it's hard to assess the global economic implications.