2018 Q1

2018 Outlook:
Asian Bonds
Endre Pedersen
Chief Investment Officer,
Fixed Income, Asia (ex-Japan)

Government policies and reforms: coupon yield. We also see value in Australian
government bonds which offer an attractive yield

D espite the US Fed continuing to normalize

monetary policy, the flattening of the US yield
China’s government is expected to continue with
deleveraging policies in 2018 while growth is
compared to US Treasuries.

curve contributed to a weaker US dollar which

helped Asian currencies perform strongly in 2017
targeted to be maintained at a reasonable level.
The deleveraging process should help the Chinese 02 Credit
(Figure 1). In contrast, for 2018, we expect US state-owned enterprises (SOE) sector in particular
rate normalization to proceed at a faster pace that and reduce overall financial risks for investors.
While Asian credit spreads have tightened
should see Treasury yields gradually move higher India is also proceeding with reforms including the
significantly, we believe credit will still be attractive
combined with a stronger US dollar. recapitalization of its banking sector to support its
in terms of income potential. We are seeing better
Figure 1: Asian currencies appreciated against USD in 2017 YTD economy.
110
value, on a risk-adjusted basis, in selective high-yield
109
Credit environment: corporates compared with investment grade due to
108 their shorter-duration. The Chinese SOE sector is
Investors have been encouraged by the tentative
107 also appealing with the government expected to
progress made with China deleveraging and the
106 pursue further deleveraging policies.
associated improvement to credit fundamentals.

03 Currency
105

Asian corporate credit profiles are also seeing

104

JP Morgan Asia Dollar Index

some improvement. As reference, Moody’s forecast
103
2017 default rate for Asian non-financial high-yield
102
Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17
corporates at 2.9%, which is lower than their US
Source : Bloomberg, 22 November 2017 We have positioned for a potentially stronger US
peers1.
dollar in 2018. While we expect the Indonesian
In particular, we see three macro trends shaping
rupiah to be broadly stable, supported by its strong
Asian fixed income markets in 2018:
foreign exchange reserves, we have reduced our
Our position going into 2018 exposure to the Indian rupee due to the emergence
We believe these factors will offer opportunities to of some headwinds to the Indian economy.
Recovering global growth and stable add value to the Asian Total Return Bond Strategy
inflation: in the following areas: Conclusion:
• As global growth continues to pick-up, Asian In 2018, an improving global economy and
economies are benefitting from a recovery in policy reforms, led by China deleveraging, are
exports, which in turn helps boost domestic expected to dominate opportunities in Asian fixed
demand. Continued growth will likely maintain
investors’ positioning in Asian markets.
01 Interest rates income. These factors bode well for Asian bond
fundamentals, and we will look to leverage these
opportunities thoughtfully to deliver consistent
• In Asia, inflation remains below trend in most
We continue to favor the higher-yielding bond returns for investors.
countries giving central banks the option
to keep interest rates on hold or even cut markets of India and Indonesia that offer attractive
rates further in some cases. A stable inflation
environment is supportive for Asian bonds.
1
Moody’s Investors Service, 11 August 2017: forecast year-end 2017 default rate for Asia non-financial high-yield to be 2.9% (lower than the forecast 2017 US high-yield default rate of 3.2%).
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