white papers
Six key investment themes for Asia and Emerging Market Fixed Income in 2021
We are optimistic about the potential for a powerful recovery across Asia in 2021 and have identified six key themes that we believe will drive Asia and Emerging Market Fixed Income over the coming year.
We think upside risks to global growth could be supported by two factors: a stronger than expected recovery in the services sector, and significant build-up in excess personal savings and excess corporate deposits. The services sector has seen a rather tepid recovery, but we expect movement restrictions to gradually ease as the effect of the vaccines take hold. After being cooped up in their homes for much of 2020, the dissemination of the vaccine should also give consumer confidence a much-needed boost. This is likely to pair well with the excess personal savings and excess corporate deposits that have been accumulated over the past year.
When it comes to our investable universe, we believe that the COVID-19 crisis has acutely both lowered the availability of yield, and reduced the supply of higher quality assets versus demand especially amid downward ratings migration. In our opinion, this structural lack of supply of quality credit globally versus insatiable investor demand had been an issue prior to COVID-19 and the crisis has simply altered this trajectory to super-drive. Ultimately, the prolonged zero interest rate cycle, lower trend growth in developed markets (DMs) and emerging markets (EMs) weighed down by their own debt, should mean a duration-induced sell-offs could be short-lived and present buying opportunities for long-term investors.
The key to identifying EM growth outperformers in 2021 will hinge on three main factors: the extent of vaccine preparedness, delta to normalised growth from 2020 levels and a stabilised level of long-term potential growth that can be achieved upon full emergence from COVID-19
It is also clear to us that the credit recovery of various emerging market countries to be highly differentiated. While it appears that DMs will have the immediate edge on the emergence from the pandemic over EMs, we expect a significant differentiation within the EM universe that will dictate their future in 2021 and beyond. This is likely to be driven by the speed of return-to-trend growth, beneficiaries from a resurgence in multilateralism and the expected feasibility of balance sheet repair. The key to identifying EM growth outperformers in 2021 will hinge on three main factors: the extent of vaccine preparedness, delta to normalised growth from 2020 levels and a stabilised level of long-term potential growth that can be achieved upon full emergence from COVID-19.
In terms of the trajectory of country ratings, we expect the worst of the downgrades owing to COVID-19 to be behind us. However, given the balance sheet scarring from the crisis, we expect the next year to see a continuation of a mild downward trajectory for EM countries.
Turning to China and we believe its refocused priorities could lead to a new structural long-term trend for Asia. Following the successful handling of the pandemic, authorities have switched from firefighting mode into taking a strategic view of long-term economic development. We believe their top priorities over the medium term will be: Dual Circulation Economics and Managing Financial Stability. Based on these two re-focused priorities, we think China will be able to create structural growth opportunities in a controlled way that can increase GDP growth by 75-100% by 2035. In addition, we believe China’s carbon neutral target will have the effect of leading to higher investment growth; while the three red line policy to control debt growth of developers will likely lead to successful cooling of the property sector.
India’s growth potential is believed to have slowed to 6% due to the disruption from the pandemic, balance sheet constraints and the moderate policy response. However, with the government firmly shifting its sights into unlocking medium-term growth potential and with the potential for vaccine availability, we expect rating agencies to take a wait-and-see approach to India’s sovereign ratings. By unlocking its growth potential, India could avert a full-blown sovereign downgrade, in our view.
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