Asian economies have entered a monetary easing cycle as the Federal Reserve cut rates for the first time in four years on Sept. 18, which creates an opportunity for global investors to invest further in Asian fixed income, money managers said.
Interest rates have been unusually high relative to regional and domestic inflation trends in Asia that have been weaker than in the West, said Navin Saigal, Singapore-based head of Asia macro for fundamental fixed income at the $10.65 trillion BlackRock.
Now that the external forces — such as a weak Japanese yen and a restrictive U.S. policy rate — have abated, it is an opportune moment for global investors to continue adding Asian fixed income to portfolios, he said in emailed comments.
The Hong Kong Monetary Authority also cut its base rate by 50 basis points to 5.25% on Sept. 19 after the Fed cut its rates by the same amount overnight in Hong Kong time.
The Bank of Indonesia also lowered its policy rate by 25 basis points to 6% a day earlier in anticipation of the Fed’s cut, and the Bank of Philippines cut its benchmark rates by 25 basis points in August.
“Both countries out-yield 10-year U.S. Treasuries by hundreds of basis points, having had to hike rates aggressively in recent years to stem currency weakness,” Saigal said.
“For years now, many Asian central banks have had their hands tied in terms of policy easing flexibility by a very weak Japanese yen and an extremely restrictive U.S. policy rate. While the former turned about two months ago, the latter has finally turned today,” he said.
Asian bonds managers have already priced in the rate cuts and are now looking more into the market environment that facilitated the cut, said Kenneth Akintewe, Singapore-based head of Asian sovereign debt at abrdn, which managed and administered £506 billion ($640 billion) in assets as of June 30.
Growth conditions in the U.S. are not as robust as in Asia, and there are growth pressures on China and Europe, which means that Asian central banks will have to anticipate weaker growth conditions, he said.
“This environment of softer growth and inflation, as it already has been, will be supportive of Asian bonds, arguably with a number of regional bond markets like India, Philippines, Indonesia, and Malaysia retaining better value."
"The backdrop of U.S. policy also bodes well for Asian currencies, some of which have already been the strongest performers this year, supported by fundamentals, stability in politics and investor flows” he said.
There is room for economies such as the Philippines and Indonesia to ease policy further, and frontier markets like Sri Lanka and Pakistan have seen sharp drops in inflation that facilitated interest-rate cuts, he added.
Central banks like the Bank of Korea and Reserve Bank of India also have easing cycles ahead, he added.
Even though the Fed’s 50-basis-point cut was largely expected by the market, investors were anticipating the Fed to express a commitment to do more, said Howe Chung Wan, head of Asian fixed income at Principal Asset Management, in an interview.
“The Fed delivered on the 50 basis points, yes. But it did not necessarily change its forecast,” he said.
In terms of local market credit, as long as the U.S. economy has a soft landing, the dollar could weaken further and there could be better flows into emerging markets, he said.
He also anticipates that the demand for emerging markets assets will now drive exchange rates as opposed to the other way around, where investors go into foreign exchange because of risk differentials.
Compared with the emerging markets, Japan and China are at a different part of the cycle and will likely be less affected by the Fed rate cuts, Wan added.
“Japan is no longer a trade-surplus country. There are not a lot of dollars sitting outside that need to come back,” he said. “The Bank of Japan is focused on whether the current wage growth cycle is sustainable and if it’s going to permeate in the structural consumption upgrade story that will filter through into the economy.”
“Some of us tend to forget that the BOJ does not behave like the Fed where every six weeks feels like a live-or-die situation. Japan is patient — think about how long they kept their rates at zero. What we see here is a small cycle so they can concentrate on domestic (data),” he added.
Japan in August adjusted its interest rate to 0.25%, which was generally well-received by institutional investors.
China, on the other hand, is pressured to keep interest rates low as consumer sentiment remains muted amid the property sector slowdown and the country grapples with its local government debt.
That said, sectors such as electric vehicles and certain areas of the manufacturing industry are doing well, he said. But China will want to keep the yuan stable and not too strong to bring back growth into China without leverage, he said.
Principal Financial Group had $699 billion in assets under management as of June 30.
