Last year, the dollar-bond market in Asia was impacted by high US treasury yields, which also saw US Federal Reserve rates remain consistently higher than Asia policy rates.
But the tide is expected to change in 2024, as signs of slowdown across labour, inflation and consumer demand are impacting the US economy, driving a change in the outlook for rates.
In this environment, “Asian fixed income offers an interesting diversifier due to its particularly low correlation with US fixed income,” Navin Saigal, head of Asia macro for fundamental fixed income, told a recent media briefing in Hong Kong.
Lower fiscal deficits in Asia emerging markets compared with those in the west and stronger growth expectations in the region, provides a good starting point to “diversify a global fixed income portfolio into Asia, especially against the backdrop of an overall declining global yield curve, and a slowdown expected in developed markets,” said Saigal.
Moreover, as the Fed pivots, and with the potential next step towards monetary easing, it opens up room for Asian central banks to start easing as early as Q2 2024.
Hence, BlackRock is “constructive for 2024 given the higher level of all-in yields and the potential to generate returns through a combination of carry, some capital appreciation, and capitalising on the dispersion that we are seeing in the markets right now.
“We are positive on most of South and Southeast Asia markets, specifically India, that continues to be on a strong footing from a fundamental standpoint,” said Neeraj Seth, CIO and head of Apac fundamental fixed income.
“With the demographic backdrop, infrastructure, economy and the geopolitical backdrop, India has a very strong and sustainable growth story,” he said.
However, Seth (main picture) is neutral on China.
“For China, as the challenges facing the real estate market and weaker consumer sentiment are still weighing on the overall growth trajectory, some expectation of further easing will remain in the market,” he said.
Lending rate and Reserve Requirement Ratio (RRR) cuts are expected to be two key forms of easing in China, aimed at releasing liquidity for the banking system to support credit growth, stabilise the economy, and potentially find pockets of growth.