Malaysia, February 21, 2022 — Western Asset Management, Specialist Investment Manager of Franklin Templeton, hosted its Asia Market Outlook webinar today which offered insights covering the key macro drivers in global and Asia fixed income, focusing on economic and investment trends in Asia. The webinar, titled "2022 Asia Fixed-Income Update", featured a panel discussion on the current market environment, sector outlook, impact of inflation overshoots, China macroeconomics, and Asia fixed income opportunities.
The Western Asset Management panelists included:
- Lian Chia-Liang, Head of Emerging Markets Debt,
- Desmond Soon, Head of Investment Management, Asia (ex-Japan), and
- Michael Dale, Head of Asia Pacific (ex-Japan) Client Service & Marketing and Singapore Office, who also served as the event’s moderator.
Celebrating its 50th anniversary this year, Western Asset Management has invested exclusively in fixed income using a consistent philosophy and process since 1971. Today, it manages more than US$492 billion for institutions and individuals across six continents (as of December 30, 2021).
Commenting on Asia local bonds, fixed income opportunities, inflationary pressures, the pullback of global fiscal stimulus, and rising interest rates, Lian Chia-Liang said:
"In our opinion, Asian local debt – including China bonds – has become a core allocation for global investors. From a valuation standpoint, it has an attractive attribute of enhancing portfolio yield, but without the higher octane features that are typically associated with peers in Latin America and other EM regions. Against a moderate inflation backdrop, Asian local currency debt, such as China (10yrs @ 2.79%), Indonesia (10yrs @ 6.50%) and India (10yrs @ 6.68%) looks attractive in real terms versus Treasury securities in developed markets. Arguably, Asian bonds present a unique blend of both EM and DM characteristics.
Specifically, the progressive inclusion of Chinese onshore bonds to major global indices underscores China’s increasingly pivotal role in steering the global economy, alongside the US and EU. Over the past two years, the risk-return profile of Chinese government bonds has been reinforced by increased investor flows and exchange rate stability. We view the healthy appetite of global investors as a secular trend, as it remains systematically under-allocated and given the diversification benefit in global portfolios.
As we move further into 2022, we expect global growth to decelerate from the robust results of 2021. We see contributing factors including a sharp pullback in global fiscal stimulus, a reduction in monetary accommodation by key central banks such as the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE), and the persistence of secular-related headwinds that include rising global debt burdens, aging demographics, and technology displacement.
Macro narratives continue to be dominated by inflation and the Covid-19 pandemic. Inflation overshoots have proven more persistent than anticipated and remain challenging for policymakers globally. However, we expect that the impact of leading inflationary components will ease meaningfully through the course of 2022. The Covid-19 pandemic continues to bedevil global populations, but we remain optimistic that the worst is behind us as vaccination rates improve around the world. While the new Omicron variant risks delaying the reopening of global economies, we do not believe that it will be derailed, and therefore remain constructive on spread-product performance, including Asia fixed income.
To be sure, global liquidity tightening could dampen prospects for Asia fixed income asset prices, as evidenced by past episodes of Fed tightening. That said, there are a few differences worth highlighting. First and probably the most important is that central banks in Latin America and Central and Eastern Europe, where inflation pressures have been felt, are midway through their post-pandemic tightening cycle, having initiated the first hikes in March 2021. For example, Banco Central do Brasil has hiked eight times over the past year, lifting its current policy rate to 10.75% from 2.0%. The second difference is that the gains in energy prices will benefit the external balances of commodity-reliant countries. Thirdly, a degree of policy desynchronization that has unfolded in Asia – notably China where the policy rate was cut in January 2022 – should have a salutary effect on growth as Omicron fades."
Commenting on China macroeconomics, Desmond Soon, Head of Investment Management, Asia (ex-Japan) said:
"China macroeconomic policy focus this year is one of broad stability. There are obvious headwinds for Chinese authorities to keep GDP growth at around 5%, CPI at ~ 2% and ensure that nine million Chinese graduates coming on stream annually can find jobs. However, we believe that Chinese authorities have the 'will' and the 'wallet' to achieve their objective. As the world's second largest economy, China is projected by the IMF to grow by 4.8% in 2022. The coronavirus was a temporary but significant disruption to growth; the country's Covid-Zero policy, however, has potentially lasting impacts into the first half of 2022.
Longer-term, we anticipate China's GDP to resume at a 4.5%-5.5% annual growth rate over the next few years as the economy continues its reorientation toward domestic sources of demand, including services industries and away from low-end manufacturing. We do not expect the US Fed rate hikes to have a significant impact on the Chinese Yuan FX. Firstly, a series of three to four Fed Funds Rate hikes is widely discounted by the FX markets and have not meaningfully weakened the Chinese Yuan FX this year. This could be due to US real interest rates remaining in highly negative territory as US CPI prints above 7%. Secondly, China external accounts remain robust and the large stash of USD onshore in China banks lends support to the Chinese Yuan.
On the China property front, investors remain concerned about defaults of highly indebted Chinese property bonds. We see the key risk for the Chinese economy stemming from a drastic tightening of lending or loans for the entire sector. While the shakeup of property homebuilders would significantly impact its long supply-chain (e.g., construction companies, subcontractors, and steel makers), we believe that the fallout will be contained, manageable and the overall economy will remain resilient. Chinese authorities have macro and property sector levers to pull should there be a need for countercyclical measures. These measures could include additional cuts to the bank reserve requirement to spur lending to the property sector and an easing of the policy rate. State-owned Chinese banks can be directed to extend credit to homebuyers and shorten approved mortgage disbursement wait times to help ease cash flow pressures."
