Assessing Asia’s macroeconomic sustainability

Measuring up Asian fundamentals

How do macroeconomic fundamentals in Asia measure up relative to other emerging markets in the current context of tighter US monetary policy? Asia ex-Japan stands out compared to other emerging markets (EM) in terms of economic resilience, boasting higher growth prospects and more contained inflation, for instance. Other metrics such as public sector finances and external vulnerabilities also feature notable improvements in the region

In this white paper, we use long-term data from the past decade to analyse trends for different EM investment-grade sovereigns in three key areas: economic resilience, public sector finances and external vulnerability. The impact of tighter US monetary policy will differ across various EM countries due to their varying degrees of resilience in these three key areas. We believe this makes Asia stand out relative to the rest of emerging-market fixed income, as shown in Table 1.

Table 1: Summary regional macroeconomic assessment

Source: LOIM. For illustrative purposes only.

Structuring allocations

How should investors structure their exposure to Asian fixed income? We advise tilting allocations towards a quality focus on investment grade (IG), creating long-term exposure to countries that are on sounder macroeconomic footing, thereby reducing exposure to en-masse ratings downgrades.

We recommend a core USD allocation to Asia and the Middle East through a bespoke benchmark of the JACI Diversified IG and EMBI Global Middle East IG, structured to maximise diversification and macroeconomic stability. For a satellite, off-benchmark allocation, we favour the GBI-EM IG Asia focused on EM sovereigns in local currency to lock in alpha opportunities from the rate cycle peaking in these countries.

For investors who believe the end of the down cycle in fixed income is near, we believe Asian IG debt is a robust way to obtain exposure to strong, stable returns from a multi-year perspective.

Read our full white paper on structuring Asian fixed income allocations using the link above.

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