11 May 2022
With contributions from the Asian Fixed Income, China Fixed Income, Singapore Fixed Income, Taiwan Fixed Income, and Malaysia Fixed Income Teams. Additional inputs from the India, Malaysia and Philippine Equity Teams, Indonesian Investment Specialist Team.
Global central banks started to hike interest rates in 2021, with the US Federal Reserve (Fed) following suit this year. Meanwhile, rate rises across Asia have been more gradual, mainly due to a relatively benign inflationary outlook. In this Investment Note, we draw insights from our pan-Asia fixed income and equity teams, who examine the impact of US-dollar strength and what this means for currencies in the region.
The region’s currencies – a granular outlook
Conclusion
US-dollar strength, a hawkish Fed, and slowing growth in China should continue to place pressure on Asian currencies through the summer months. Even though the region’s central banks are expected to normalise monetary policy, this will be at a slower rate than developed markets. More positively, the outlook for the second half of the year is relatively upbeat.
1 The Bank of Korea has already increased its policy rate by 75 basis points (bps) so far this year, while on 3 May, the RBA hiked the official cash rate by 25 bps to 0.35%, from a record low 0.10%, with the central bank signalling the likelihood of more increases in the coming months. Australian consumer prices rose 5.1% on year in the first quarter, with core inflation rising 3.7%.
2 In the last six months, MAS moved to raise the slope of the band twice amid rising inflation, including an off cycle move in January 2022.
3 Note that in terms of consensus estimates, current account deficit is estimated to remain elevated in 2022 to 2023. Meanwhile consensus estimates point towards a depreciating PHP until 2024.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.