Fixed income strategy:
Asia has distinguished itself as a quality, stand-alone market worthy its own strategic asset allocation
Credit conditions in developed markets are expected to deteriorate further due to slower growth and elevated levels of debt and unemployment. According to the credit rating agencies, however, the default rate is relatively lower in Asia, and we believe that the fallen-angel risk is comparatively more manageable in this region1.
Asia Pacific and global high yield (HY) bond default rate2
Indonesia’s macroeconomic fundamentals largely remain intact, and the country’s central bank has exercised prudence by cutting rates and stabilising the rupiah amid the lowest inflation in almost two decades3. We expect that Indonesia will continue to boast relatively attractive real yields and there is further room for interest-rate cuts in 2020.
Lowest inflation rate in almost two decades in Indonesia4
We believe that the most significant short-term opportunities lie in credit selection. Overall, the region should be better positioned than its global peers, thanks to its high credit quality and a broad array of diversified fund channels. We are positive on China, state-owned enterprises (SOE) and quasi-sovereign entities.
China has arguably led the world on the road to economic recovery5, and the People’s Bank of China should remain supportive amid escalating geopolitical tensions and ongoing financial challenges. We are notably positive on the SOE and real-estate sectors. These segments are crucial for a prolonged economic revival and should receive robust government support.
Many SOEs and quasi-sovereign entities are national champions and enjoy access to diversified funding streams. They also have very resilient credit profiles and should benefit from continued monetary easing in the region.
1. Fitch Webinar, 12 May 2020. “Fallen Angels in the US and Europe”, May 2020. There have already been over 20 fallen angels recorded in March 2020 in the US and EMEA. This is compared to roughly 50 fallen angels recorded in Asian credit markets over the past 12 years.
2. Moody’s Investors Service, 29 April 2020.
3. Jakarta Globe, 19 June 2020. Bank Indonesia projects the country’s gross domestic product (GDP) growth to range from 0.9% to 1.9% in 2020 but growth is expected to rebound to 5% to 6% next year.
4. Bank Indonesia: https://www.bi.go.id/en/moneter/inflasi/data/Default.aspx, as of 31 July 2020.
5. Goldman Sachs Investment Research, 4 January 2020, 15 May 2020.