Fixed income investments have experienced unusually high volatility over the past twelve months as expectations for interest rate cuts have swung wildly.
But with policy normalisation now in sight and yields headed gradually lower, Alfred Mui, head of Asia fixed income at HSBC asset management, believes Asian fixed income is looking ripe for a carry trade.
“Nothing is really fixed,” Mui said at a recent media event in Hong Kong. “Just look at the rate market: last year the market expected more than seven rate cuts. We’ve only had two, with maybe one more in December.”
“A soft landing path plus a policy normalisation is a perfect setup for a carry trade, and where can we find this trade? I think it’s Asia,” he said.
Although he expects a slight slowdown in the US, Mui does not anticipate a major economic downturn, which should bode well for Southeast Asian economies.
He argued that Asia stands out as a diversified carry strategy because of its low volatility and resilient economy.
In his view, the risk-reward is compelling for the asset class given the average yield of 5.6% for Asian investment grade credit as well as the lower duration and thus lower rate volatility.
“The average quality of Asian investment grade is also very strong,” he said. “Lots of issuers are coming from sovereign or quasi sovereigns, or from major conglomerates in regions with stable fundamentals.”
Further down the risk curve, he isn’t necessarily averse to Asian high yield either, due to the fact that Chinese property has already been largely removed from the indices.
“I think there is a high chance China will gradually bottom out from this credit cycle, and lots of issuers have strong access to access to onshore funding,” he said.
“I think a more balanced and diversified universe with a nine handle yield and a 2-year duration is quite an interesting proposition here.”
When it comes to the issue of currencies, most Asian foreign exchange rates are fundamentally cheap versus dollar, in his view.
Asian equities
When it comes to Asian equities, Caroline Yu Maurer, head of China and core Asia equities at HSBC AM argued that the market has not yet appreciated the growth potential of the asset class.
“If you look at the Asian market as a whole for 2024, the earnings growth was actually quite strong. It was almost over 20% earnings growth – while the market return was below that,” she said.
“So that basically means the market didn’t give full credit to Asian equities’ very strong earnings growth – therefore valuations have come down.”
She expects that next year Asian equities could deliver 12% earnings growth, providing a “pretty good return profile” given its low valuations and the fact that it is “under owned” by international investors.
Even in India, where foreign investors have been flocking to the equity market as an alternative exposure to China, she said it has still been primarily driven by domestic money.
When it comes to Hong Kong equities, if the macroeconomic environment in the region stabilises – she said investors might see a re-rating on top of corporate earnings growth.
She said: “I think next year you will see more domestic stimulus, so domestic orientated, consumption related, tech localisation, infrastructure sectors will do better because that is where the stimulus is going.”
