Protectionism looms over Asia’s bond markets

For sellside individuals that cover onshore renminbi, Hong Kong dollar and dim sum bonds, trade protectionism was their biggest concern this year


7 Jun 2018


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SELLSIDE individuals cite protectionism as one of the key risks in Asia’s local currency bond markets this year but are positive on the stable growth story.


This is according to more than 600 individuals in research, sales and trading covering local bond markets across Asia who were nominated in Asset Benchmark Research’s (ABR) annual Asian Local Currency Bond Benchmark Review. As part of the review process, they were asked about the risks and opportunities facing the Asian local currency markets they are active in.

For individuals that cover onshore renminbi, dim sum and Hong Kong dollar bonds, protectionism was their biggest concern this year. This compares to 2017, when China debt and currency concerns were at the top of the list.

 “US trade policy may lead to countries devaluing their currencies as a tool of revenge,” says a research head in Hong Kong. “Threats of a full-blown trade war is the biggest wild card,” argues another. “It is already having a detrimental impact on the global financial markets and will inadvertently have negative implications for global trade and the global economy”.

Worries over China’s ballooning debt have abated given the stringent deleveraging measures enacted by the People’s Bank of China (PBoC) as well as onshore banking, securities and insurance regulators over the past year. Concerns over the currency have also subsided given the appreciation of the renminbi during this period. 

The rise of protectionism, while still ranking among the top three, was less important in other markets in Asia. For sellside covering Indonesia, Malaysia and Thailand, foreign fund outflows took first place on their list of worries and more Fed rate hikes than expected came in second. “If the US rate hike is higher than expected, we could see local currency yields may not be attractive anymore on a relative basis and it could trigger foreign fund outflows,” says one trader in Indonesia.

In markets such as India and the Philippines that are more driven by domestic demand, inflation is what keeps them awake at night. “Markets are going to remain volatile this year on the backdrop of conflicting signals on inflation, political uncertainty coming to the forefront as we head for general elections next year and continuing rate hikes in the US rates and its potential impact on FPI (foreign portfolio investment) flows,” says one salesperson based in Mumbai.

However, despite the risks of, among other things, protectionism and foreign fund outflows, sellside participants are broadly positive on the direction of Asia’s local currency bond markets. Onshore sellside individuals are positive about the CNY market bouncing back, particularly with the involvement of offshore investors. “As the economy grows stronger, the grip of strict regulation and tightening monetary policy on China onshore bond market will be less,” explains one economist based on the mainland.

Recently Bloomberg announced that it will add onshore government and policy bank bonds to the Bloomberg Barclays Global Aggregate Index from April 2019 onwards given certain operational improvements by the PBoC and Ministry of Finance. This is expected to push emerging market allocations in the currency higher.

Those covering dim sum bonds are also bullish and expect to see more issuances, which will enhance liquidity. Additionally, the offshore appetite for CNY bonds is expected to further revitalize the CNH market. “Appetite for CNH bonds should receive a boost, helped by their high yields and reduced concerns about renminbi depreciation,” says one trader based in Hong Kong.

In Southeast Asia, overall currency appreciation in Thai baht and Malaysian ringgit is positive for these markets says one Singapore-based economist. “There are some opportunities for investors to extend duration to long-end bonds in Thailand and Malaysia on low inflationary pressure and constructive onshore support,” he adds.

These markets also benefit from strong fundamentals and a sustainable growth story. “[The rupiah bond market is] supported by some reforms and infrastructure development, manageable inflation and consistent fiscal and monetary policies,” says one Jakarta-based economist.

The sovereign rating upgrade of Indonesia out of junk status by Standard & Poor’s in March contributed to record foreign inflows into the nation’s bonds in 2017. Recently Moody’s Investors Service also upgraded the Government of Indonesia’s long-term issuer and senior unsecured ratings to Baa2 from Baa3 with a stable outlook.

Apart from rating upgrades, as of June this year, rupiah debt will be eligible for inclusion into the Bloomberg Barclays Global Aggregate Index which is also likely to have an impact on investor demand.

For a trader based in Kuala Lumpur, the sentiment on MYR bonds is positive despite the rising interest rate regime globally. “Ringgit-denominated bonds, though are somewhat impacted, are viewed largely resilient thanks to the robust local economy as well as well-controlled inflation,” he says. Last year the ringgit rebounded from a 19-year low on the back of better economic growth, the hawkish central bank stance as well as stabilising oil prices.

The Singapore dollar bond market is also benefiting from appreciation, having a stable monetary policy, as well as seeing the entrance of traditional US dollar issuers such as Logan Property. “The diversification of issuers coming to raise cash in the SGD market [is] a sign that the market is starting to deepen and should lead to better liquidity as more participants/market makers get involved,” says one trader based in the city-state.

The Asian Local Currency Bond Benchmark Review 2018 covers 11 markets including China (onshore and offshore), Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand. It has been conducted annually since 2000. It provides a wealth of data on the product needs of investors and the market penetration of the banks that are active in local currency bonds. It also provides detailed analysis on the investors’ behaviour when selecting their counterparties, giving unprecedented access into the minds of investors.


7 Jun 2018


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