MARKET COMMENTARY
The main event for November was the US presidential elections, which resulted in a victory for Donald Trump and Republican control of the House of Representatives and the Senate. That backdrop saw US risk assets do very well, with the S&P 500 up +5.9% in total return terms for the month, supported by ongoing strength in US economic data such as ISM and initial jobless claims numbers. US rates continued their march upwards as the 10y UST touched 4.48% over fears of inflationary overruns under the Trump administration, which resulted in some pricing out of cuts by the Fed into 2025. US rates calmed down over the end of the month as markets took comfort in Scott Bessent’s (a macro hedge fund manager) nomination for the post of US Treasury Secretary. The 10yr Treasury yields were down over 20bps in the last week of the month, trading firmly in the 4.2-4.25% range.
We believe that there is a limit to the scale of further fiscal expansion in the US, as the administration comes to terms with refinancing their new additional debt at 4-5% coupons rather than 0-3% as during the 2010-2022 period. Nevertheless, domestic US growth will be higher – fuelled by tax cuts (new and extensions to existing policies) and deregulation. This will be accompanied by a shallower Fed rate-reduction path. In our renewed base case, we expect only two or three rate cuts by the end Dec 2025 (from the current 4.625% median rate), bringing the median Fed rate down to 3.875% or 4.125%. There is an increased likelihood that the Fed will adopt a wait-and-see attitude to the new administration’s fiscal loosening policies and hence could pause its rate-cutting path by one to two quarters into 2025. In the longer term, however, we expect lower UST long-end yields (or at least not materially higher yields) on the basis that it would be fiscally unsustainable for the US to fund itself incrementally at higher new coupon yields (of up to 5%).
Amidst this backdrop, we expect China to be able to navigate the additional import tariffs and the resulting drag on growth through further domestic stimulus measures. All in all, we expect that they will be able to achieve a GDP growth of 4.5-5%. Over the medium term, this acts as a forcing function for China to invest heavily into technological and energy self-sufficiency.
While Asia will need to contend with a stronger USD, most Asian economies are in the midst of a cyclical rebound in growth and so should be able to weather the headwind in their stride. As we look into next year, a normalisation in both the term premium and the resumption of the rate cut cycle should contribute to positive performance for the asset class.
PORTFOLIO COMMENTARY
The LO Asia IG fund was up 0.32% over the month of November, slightly below the JACI IG benchmark at 0.56% over the same time. The YTD outperformance of the fund versus the index stood at 330bps (Fund YTD: 8.5% vs. Index YTD 5.2%) as at 11th December 2024.
Over the month, we added to Alibaba 10-year bonds via the new issue as we believe it has room to compress in the medium term once the supply has been absorbed. We also added exposure to Bangkok Bank (BBL) – a conservatively run bank in Thailand with over 20% market share via their Tier 2 in the 5y part of the curve, where we believe spread and rates compression potential is highest. We funded that by cutting tight Kyobo Life Insurance hybrid papers and similar tight bonds in the financials space.
The portfolio remains well anchored with a YTW of 5.8% with 139 issues and 91 credits. We continue to maintain a duration overweight (6.3 years) versus the benchmark at 4.7 years. We expect the strategy to remain fully invested and outperform from a total return and relative perspective given attractive carry and spread compression potential.
Thank you for your continued support.
NIVEDITA SUNIL
On behalf of the LOIM Asia Fixed Income team