investment viewpoints
a positive outlook for Asian credit in 2019.
We are optimistic on the outlook for Asia credit for the coming months and we have identified several key themes we believe will shape market activity over the course of the year.
Yields have started the year at elevated levels, leaving good room to run with the more accommodative stance from the Federal Reserve. We believe this more moderate tone from the central bank will set the tone for the Asian USD credit landscape in 2019.
Compared to Jan 2018, emerging markets (EMs) are starting off in a more comfortable position. Higher EM domestic rates, readjusted EM currencies, and fewer rate hikes from the Fed will likely allow EMs to focus on growth once again, albeit at a more moderate pace.
Additionally, the major shift in China’s stance towards policy loosening will likely lead to lower Chinese USD yields in our opinion. We expect the People’s Bank of China (PBOC) to further lower the capital requirements for banks, inject liquidity via various targeted lending facilities into the banking system, and to support capital raising at the large Chinese banks. All this will be supportive for macro growth, whilst various new initiatives are being put in place to provide alternative sources of funding for private sector firms. These include the development of the onshore asset-backed-securities market and introduction of a “enterprise bond” programme.
In Indonesia, macroeconomic prudence has been the highlight by the current administration and they are expected to outperform on their fiscal deficit targets in 2018 and 2019. We expect inflation to stay low, growth to be at around 5.4% and reform process to continue. The government remains committed to improving its business/investment environment, which should in turn encourage greater investments, exports, capital inflows and boost growth in the medium term.
We believe global funding markets for Indonesia to be wide open in 2019 on the local currency front, which will aid the Indonesian USD bond markets. Long duration Indonesian Investment Grade bonds started the year at elevated spread levels, and have good room to tighten given the macro backdrop.
With regards to India, national elections due in April-May 2019 which could bring short-term volatility, but we believe fiscal consolidation has been widely accepted by the two major political parties. Overall, we consider that the Indian economy has generally continued to perform irrespective of election outcomes and Investment Grade bonds stand at attractive valuations versus global peers.
Overall, we expect Asian USD bond supply to be more lower and more diverse in 2019. Asian USD bond issuance has been the fastest growing major credit market globally, and recorded net issuance of over USD 140 billion in 2018, despite negative net issuance from Latin America and Central & Eastern Europe, Middle East and Africa (CEEMEA), as well as US and European HY bond markets.
Net issuance this year is expected to be extremely low; down to levels last seen during 2011. Such reduced net supply is likely to provide a very strong technical backdrop for the Asian USD credit spreads to tighten, especially if demand for the asset class is higher with investor inflows.
Overall, lower projected net new issuances in various segments of the market, China’s policy loosening, Indonesia’s macroeconomic prudence, removal of overhang from India’s national elections, and pent-up demand for emerging fixed income asset class, could add wings to a rally in 2019.
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