Asian currencies and Asian bond yields have historically moved in tandem with the US Federal Reserve’s rate cycles, especially in bond markets with high foreign ownership. A stronger dollar generally has led to weaker Asian currencies and higher bond yields.
“However, in 2015 we believe the both Indian rupee and the Indonesia rupiah have adjusted already; further policy actions and foreign international flows are expected to drive the direction of the currency and bond markets, rather than just the dollar strength,” the company said.
Investment case
In 2014, First State advocated investing in Indonesia and India fixed income market.
“We believed that the additional yield investors received when investing in these bond markets should compensate for any adverse currency movements.
“[With clearer sight on these new governments and a snapshot of some of the policy initiatives evolving, we are reaffirmed in our view.
“2015 will be an interesting time in Indonesia and India. This time, however, it will be interesting due to positive momentum, not due to uncertainty.”
Ratings upgrade
Following the reform initiatives, both countries have also come on the radar of rating agencies.
“The removal of the negative outlook on India’s BBB- rating by S&P in September 2014 highlights the positive momentum that these reforms are bringing. Yet further reforms are both needed and forthcoming.”
Further reforms in India include goods and services tax, simplification of land acquisition processes and inflation targeting for the Central Bank.
First State noted that inflation has declined in both India and Indonesia and the slide in the oil prices is seen benefitting India further in containing inflation.
Taking note of the fall in inflation, the Indian central bank during mid-January, surprised the markets with a 25 basis point cut in interest rates.
“While the reforms thus far have been encouragingly positive, as a bond investor, we feel a move to towards inflation targeting would be one of the most compelling reforms and could be a major driver for lower yields in the new year.”
S&P remains the only agency to continue to rate Indonesia as sub-investment grade.
The agency stated clearly early in 2014 that a rating upgrade was possible should government policies be successful in seeking to stabilise Indonesia’s fiscal vulnerabilities.
“We feel that the ability of a new government to raise the fuel price could bring Indonesia one step closer to attracting investment grade ratings from all agencies in 2015,” First State said.
