investment viewpoints
Outlook 2021 – Asia fixed income
Ample reasons for cheer in 2021 Asia fixed income markets
As we look forward to the New Year, we believe Asia has ample reasons to cheer. On a trade and policy front, there are two positive developments: Joe Biden’s upcoming presidency and the freshly minted Regional Comprehensive Economic Partnership (RCEP) deal. A Biden presidency will likely reintroduce predictability of US policy towards China and some expected economic cooperation with the ASEAN region. Furthermore, the 15-country RCEP free-trade deal will be positive for intra-Asia trade with simplified tariffs and regulation.
The above developments come at a time when Asia is starting to experience a reasonable demand recovery after tremendous monetary and fiscal support, largely in response to the COVID-19 pandemic, by various Asian countries during 2020. An unprecedented amount of wealth transfer has occurred from the public to private sectors and this has shown up in increased demand for goods, such as homes, cars and personal goods.
We expect this demand recovery to continue in 2021, but it is likely to be services led. This will happen as movement restrictions ease up gradually, travel bubbles among various Asian countries are formed and pent-up demand for services plays out. Giving a further tailwind is the imminent roll-out of vaccines, which are expected to be rolled out internationally (external to the US) starting in the UK from Dec 2020.
We expect 2021 to characterise a period where pent-up demand could be truly unleashed.
Under this backdrop, we expect 2021 to characterise a period where pent-up demand could be truly unleashed. This would end the services-led recession in Asia. Markets are already anticipating this and the current buoyant equity markets and easy debt funding markets should, in turn, spur firms with strong capitalisation to look towards investments once more.
China’s five-year plan
Asia’s economic stability and recovery will be further grounded by China’s clarity and implementation of its revised economic development plans. It has recently unveiled its 14th five-year plan (FYP) as well as a blueprint for its longer-term strategy outlining its vision for 2035. China now aims to double its GDP by 2035, implying annualised growth rates of 4.4% between 2021 and 2035.
As part of China’s next FYP, the country is expected to increase its focus on self-reliance, balance between growth and maintaining financial stability, achieve self-sufficiency in key technological sectors and spend more on research and development, as well as education. In addition to being self-reliant, China plans to open up its financial markets further and improve international cooperation. But perhaps the most significant element in the latest FYP is China’s commitment to the environment, which is aligned to its plan to reach peak carbon emissions by 2030 and be “carbon neutral’’ 30 years later (2060).
To achieve this goal, which is closely aligned to the target set by the Paris Agreement, China would have to spend trillions of dollars on climate measures over the next few decades. The Boston Consulting Group estimates that China would need to spend between RMB 90 to 100 trillion on climate measures over the next three decades. The investments will be across energy production, construction, transport and waste treatment and would boost employment and investment trends favourably for China and the broader Asia-Pacific region.
Caution and selection paramount
While we have a lot of reasons to cheer and be optimistic, there are two things holding back our animal spirits. (1) Impaired balance sheets after 2020, and (2) valuations following the strong run-up in credit markets since Q2 2020. Simply put, the increased clarity and predictability for 2021 has left the Asian and emerging credit asset classes nowhere near being as attractively valued as they were earlier this year.
This means we continue to believe caution and selection are paramount in credit investments, as this recovery will likely leave many issuers who have impaired balance sheets behind. Most of the credit issuers negatively affected in 2020 will only see a full recovery of their balance sheet strength and credit metrics over a span of years rather than quarters. Moreover, we expect a not inconsiderable few to be downgraded and eventually have to face the rescheduling and restructuring of debt. In this manner, we see this crisis as being more mature for emerging markets, than during the period after the 2008 financial crisis.
As a result, we favour large domestic markets in Asia which have sufficient growth and fiscal buffers, corporates with recovering cash flows and a strong set of assets to fall back on, and higher-grade credit in general. We look forward to a hopefully benign credit market for Asia, with stable carry and mild spread compression.
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