What could trip up the Asian local currency bond markets?
Prevailing atmosphere of optimism in Asia could be dampened by an unexpected increase in Fed interest rates or further trade tariffs
The mood in Asian local currency bond markets for the year ahead is distinctly upbeat. Nine out of ten leading sellside individuals have either a positive (58%) or neutral (34%) outlook, according to a survey* conducted by Asset Benchmark Research (ABR). Interestingly, traders are slightly more positive than salespeople or researchers.
But despite the optimism, external risks cloud the horizon. When asked what would impact Asia’s local currency bond markets in the coming 12 months, a hike in Federal Reserve rates emerged as the top concern for over one-third (37%) of respondents. One year ago, the threat of US trade protectionism was the dominant reason for anxiety and this could still re-emerge as the top fear factor once again.
On May 5, after the Trump administration had accused China of reneging on trade commitments and subsequently announced a new round of tariffs, many respondents signalled alarm. While up to May 3, only 14% of sellside professionals ranked the trade war as their top concern, after May 14 the percentage increased dramatically to 25%.
Sellside individuals covering the Philippine and Indonesian markets express the most positive view on the outlook in the coming twelve months, while individuals in India are the least optimistic.
Apart from external factors such as Fed rate changes and the US-China trade war continuing to dominate market behaviour, indigenous factors are undercurrents in each currency bond market.
With the inclusion of Chinese bonds into the Bloomberg Barclays Global Aggregate Bond Index, over half of the sellside individuals, who are active in the onshore renminbi bond market, expect the share of foreign institutional investors to exceed 5% in the coming two years. “Our research team expects the index inclusion will likely accelerate the pace of inclusion by other global bond indices, and we estimate foreign ownership to rise to 4-7% by the end of 2020,” says a salesman from an international bank.
The bond index inclusion also speeds up sellside professionals’ expectations on the convergence of the CNY and CNH bond markets. “Along with the global bond inclusion - China’s authorities have revived their willingness to make the RMB more global in nature. This is evident from the launch of the CNY payment system (CIPS), the relaxation of outbound investment channels, repatriation and FX hedging rules between QFII, RQFII and CIBM, and the expansion of foreign participating banks’ access to the onshore interbank RMB FX and funding markets,” says a salesperson at a European investment bank.
Moving south to Malaysia, the local sellside community is concerned about the possible removal of the country from the FTSE World Government Bond Index (WGBI). “It is estimated that US$-3 trillion of funds are benchmarked against the WGBI, of which Malaysia’s weight is 0.4% (US$8.0 billion at the low-end),” says a member of a senior trading desk at a local bank. In fact, almost half (49%) of the sellside professionals active in the ringgit bond market anticipate that liquidity will decrease if the country’s removal is finalized after the September review by FTSC Russell.
In nearby Indonesia, with Joko Widodo’s second term and his pledge to promote infrastructure spending, 80% of sellside individuals believe that the rupiah bond market will play a more strategic role. “Infrastructure-related bonds have been the main driver for the brisk corporate bond issuance in Indonesia between 2016-2018. Going forward, the need for infrastructure financing will remain big in the near future. Thus, we expect a decent supply of infra-related corporate bonds in the next 12 months,” says Amir Dalimunthe, head of fixed income research in Danareksa Sekuritas.
Travelling back north to Thailand, amidst the political uncertainty of the Thai election, sellside individuals are calm and self-assured. The Thai bond market has a strong local backstop and foreign investors have been underweight in the Thai baht bond market. “There hasn’t been any meaningful offshore allocation to Thai government bonds in the last few years. As such, beyond a knee-jerk reaction to adverse political developments (if any), we don’t expect any sustained adverse implications for the Thai baht bond market,” says Swapnil Kalbande, researcher at Deutsche Bank.
*The survey of 346 sellside individuals took place between April 26 and May 14. The sellside individuals were nominated by investors taking part in the Asian local currency bonds review 2019.
To view the rankings of the best research, sales and trading individuals in Asian local currency bonds by country, please visit https://www.theasset.com/awards/local-currency-bond-individuals-2018.
To find out more about Asset Benchmark Research, visit http://www.theasset.com/research-project.