13 March, 2020
The steep decline in oil prices during the week of 9 March 2020 sent global markets sharply lower. However, Asia may emerge as a principal beneficiary of this trend, as many countries in the region are net oil importers. In this investment note, Endre Pedersen, Chief Investment Officer, Fixed Income, Asia (ex-Japan), explains why Asian fixed income may be well placed to withstand short-term market volatility and how to capture long-term opportunities for investors.
The recent sharp decline in oil prices, coupled with the ongoing risk-off market environment, introduced additional volatility and uncertainty to global and Asian financial markets.
During periods of heightened volatility, investors are unlikely to appreciate the contrast between the region’s “winners” and “losers” that come from lower oil prices. For example, on 9 March, the Korean won, and Indian rupee both weakened against the US dollar, despite South Korea and India being beneficiaries of oil-price weakness.
Similarly, Asian credits lack differentiation at this juncture, as most Asian credit spreads widened given the already thin market liquidity conditions. We believe that some of these dislocations are driven more by market sentiment than fundamentals.
In our view, the following markets will benefit or be hurt by lower oil prices.
Once markets stabilise, the sharp fall in US Treasury yields and increased Asian yield premiums (versus developed-market bonds) should be broadly supportive for Asian hard- and localcurrency bonds. Notably, the currencies of Asia’s net energy importers should outperform on a relative basis. In the medium term, with US Treasury yields lower and the spread of COVID-19 largely contained in Asia, liquidity conditions should normalise, and this will help to recover some of these price dislocations.
Furthermore, we think that high-quality Asian investment-grade (IG) credits, including most government-backed oil names, will continue to see strong support. However, gaming and commodity issuers in the private sector may face headwinds. Investors should be more selective in credit screening for these sectors.
Transitioning to India’s next stage of growth
India’s growth agenda is well embedding the primary driver of digitisation that supports the formalisation and reinvestment policies underpinning manufacturing expansion. This is starting to show results with visibly improved capital expenditure and industrial order books, as well as a narrowing current-account deficit and a healthier inflationary picture.
Bank of Japan tweaks its yield curve control policy: market implications
The Bank of Japan’s recent decision to fine-tune its yield curve control policy may have caught investors off guard; however, the bigger surprise could be that the adjustment was less hawkish than expected.
Q&A with the Portfolio Manager: Global Healthcare Equities
COVID-19 is largely behind us in terms of a global health crisis and a hard hit to global financial markets. Yet, amid a widely predicted economic recession, the world is adjusting to the post-pandemic era. In this Q&A, we highlight how our Global Healthcare Team adopts a differentiated approach by triangulating its investment thesis and quantifying key inputs into the investment framework.
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