Kim said Asia continues to look attractive relative to other emerging markets given the stronger macro picture, positive reform stories and room to ease monetary policies, influencing allocations away from weaker emerging markets to the stronger players in the region.
“Even if we expect Fed to tighten policy rates, we can identify a number of Asian countries where there will be [monetary policy] easing. China is already easing. India is another good example.”
“There is a credible policy from the Reserve Bank of India, you can expect low inflation on the back of low oil prices and RBI can ease policy in 2015. We expect more of this re-rating in India in 2015,” he said.
Countries that can take measures to address external vulnerabilities and take steps to improve their current account and fiscal positions would do well.
“Even if yields go lower in the US, the attraction of bond market that yields 8% will simply be too high. As long as you avoid external vulnerabilities and currency depreciation, Indonesia should still be attractive.”
BlackRock remains “sanguine” on Asian corporate credit with valuations looking fair. This is in line with credit spreads globally and Asian credit still offers selective value relative to developed markets.
“We continue to see opportunities in high yield where valuations are attractive and where credit selection is increasingly important.”
US normalisation-a risk?
According to Kim, Asian fixed income has a “good chance” of decoupling from the US rate cycle over the coming year.
Fixed income market will do well in 2015 than what a lot of people expect even if the Federal Reserve starts hiking rates, whether in the middle or the third quarter of the year, Kim said.
“Clearly the main risk for the markets is the normalisation process in the US, the communication from the Fed and the transparency around what they will do. If they do it well, you will not see a taper tantrum that you saw in 2013.”
He cited an illustration when the Fed hiked the rates to 5.25% from 1% during 2004-2006.
“What happened to fixed income in Asia? For Asia, around the first rate hike, a lot of central banks were easing policy rates. So, throughout this cycle of [US] tightening, Asian bond markets were returning positive numbers, and currencies by and large appreciated and credit spreads came in. By and large, Asia fixed income did fairly well.”
Furthermore, this time around things are slightly different with commodity prices at low, which will be positive for most Asian countries.
Currency impact on policy divergence
Developed markets monetary policy divergence remains a strong factor affecting fixed income markets in Asia. Rather than through bonds, the trend is being felt through currencies.
Kim acknowledged that the Asian currencies would probably be a bit weaker than the US dollar. But, he added that there is a decent probability of Asian countries doing better than the emerging markets and other developed countries.
On the direction of Chinese renminbi, he said, “Even after the [recent Chinese easing] policy move, we still think sharp depreciation is unlikely in RMB as it can lead to significant capital outflows and complicate the domestic agenda in terms of managing liquidity and monetary conditions.”
Balance of payment in China and current account surplus situation is still positive, he added.
