Monthly Outlook SEPTEMBER 2013

Transcription

1 Monthly Outlook SEPTEMBER 2013 In August, the yield curve of US Treasuries continued to steepen as the likelihood of the US Fed tapering to start before year-end became stronger. Asian Local Currency fund outflows picked up again while Asian currencies were mixed. The Indonesian Rupiah and Indian Rupee bore the brunt of the Emerging market weakness with both currencies depreciating over 8%. Asian credits were weighed down by rising US Treasury yields and concerns over India and Indonesia. Koh Liang Choon Head of Fixed Income Nikko AM Asia Limited We remain neutral to slightly underweight on Indonesian bond duration on concerns of further capital outflows, inflation concerns and a high percentage of foreigners holding Indonesian bonds. We are also underweight on Malaysia s duration based on general Emerging market weakness, and on its vulnerability to foreign selling on US tapering expectations. We are neutral on Singapore duration given the market has underperformed US Treasuries and expect to see some support for Singapore government securities on Syrian tension and firmer US Treasuries. We remain cautious on Asian currencies with weak external balances and are holding more USD cash given the current weak sentiment in emerging markets. For Asian credits, we will maintain a more defensive positioning across both dimensions of duration and credit risk, and remain underweight on overall portfolio duration amidst an environment of rising rates.

2 ASIAN RATES AND FX US Treasuries yield curve continued to steepen The US Federal Open Market Committee (FOMC) minutes showed greater agreement for a tapering decision before the end of the year. Stronger than expected July existing home sales, June Home Price Index and July leading indicators supported expectations that a tapering decision could happen as early as the September FOMC meeting. These developments pushed US 10-year treasury yields to a 2-year high of 2.93%. However, US July new homes sales disappointment and tensions in Syria brought 10-year yields lower towards the end of the month to end at 2.78%. Interviews with a few FOMC/Fed policymakers during the Jackson Hole conference supported the likely case of the US Fed tapering to start before the end of the year. Asian Local Currency fund outflows have picked up again Emerging markets (EMs) especially in Asia are experiencing an acute stress phase once again. EPFR data shows that since 22 May, cumulative outflows from EM bonds topped USD23bn, almost fully reversing the USD30bn of inflows between mid-2012 and May Asian currencies were mixed versus the USD The Korean Won was the strongest currency in the region, gaining over 1% for the month while the Chinese Renminbi and Singapore Dollar ended the month flat against the US Dollar. The Indonesian Rupiah and Indian Rupee bore the brunt of the Emerging market weakness with both currencies depreciating over 8%. This currency volatility has increased rating concerns of countries with dual deficits (fiscal and current account) like Indonesia and India. Malaysia s Q2 GDP growth came in below expectations GDP growth came in at 4.3% as compared to market expectations of 4.7% and 4.1% in the previous quarter. Bank Negara Malaysia lowered its 2013 GDP growth forecast to % from 5-6%. The good news is Malaysia avoided a twin-deficit by posting a current account surplus of MYR 2.6 bn versus consensus expectations of a deficit of MYR 0.9 bn. MALAYSIA AND THAILAND LOWERED THEIR GDP GROWTH FORECASTS Bank Indonesia raised the Reference rate to 7.00% from 6.50% in an unscheduled meeting The overnight deposit facility FASBI rate was also raised an equal amount to 5.25% from 4.75%. BI also reduced the holding period for Bank Indonesia Certificates (SBIs) from six months to one month, reversing the capital control announced in May At the same time, BI announced that it had signed a USD12bn extended bilateral swap with the Bank of Japan (BoJ). Earlier in the month, during a regularly scheduled meeting, BI had kept the benchmark policy rate on hold at 6.5%. However it had surprised the market by announcing tweaks to the reserve requirement ratios and other measures intended to control the excess liquidity. BI stated that it will conduct supervisory action to rein in still-strong credit growth in several banks and specific sectors, including those with high import content. The Indonesian government unveiled a policy package to address the widening current account deficit, rising inflation and slowing growth.

3 Singapore headline inflation printed higher in July than in June The Singapore government recently upgraded GDP growth to 2.5%-3.5%, following strong 2Q GDP (+3.8%). The official upgrade implies a 4% average growth in 2H Furthermore, the labour market remained tight with unemployment at 2.1%. Overall inflationary pressures have subsided (+1.9% in July), but the Monetary Authority of Singapore has remained vigilant on wage cost pressures. The Thai economy fell into a technical recession in the second quarter Growth contracted a further 0.3% quarter on quarter (QOQ) in the April to June period, following a revised 1.7% decline in the first quarter. On a year on year (YOY) basis, GDP expanded by 2.8%, slowing from the revised 5.4% growth in the previous quarter. The print was a downside surprise to consensus estimates of a 3.3% YOY gain, and came on the back of weakness in manufacturing and agriculture production. The secretary-general of the National Economic and Social Development Board (NESDB) reduced its growth projection to between %, from a previous forecast of %, citing easing domestic consumption, slowdown in investment and weaker exports as reasons for the revision. Meanwhile, the NESDB expects headline inflation to print between % this year, from 3.0% in Philippines s 2Q GDP growth beat expectations at 7.5% YOY The Philippine economy continued to experience stable growth and the Finance ministry thinks it can surpass its growth target of 6-7% of GDP for 2013 (2012: 6.8%). Over 2Q, GDP growth was 7.5% YOY, which beat expectations of 7.2% for the period. However, the balance of payments (BOP) surplus fell 65% to USD 1.1bn in July from USD 3.2bn a year ago. Bank of Korea kept rates on hold and expressed confidence in outlook The Bank of Korea maintained the policy rate at 2.50% at the August meeting, as expected. This was the third straight 'on hold' decision after cutting rates by 25bp in May, and also the third unanimous decision in the last eight meetings. In its monthly economic assessment, the Ministry of Strategy and Finance saw a general improvement in economic conditions, citing that economic indicators such as production, consumption and investment were improved. Notably, 360,000 jobs were created in June, faster than the 265,000 workers employed a year earlier. However, the Government cautioned over the risk of earlier withdrawal of US quantitative easing. Real GDP growth moderated to 4.4% YOY over Q in India India s GDP growth slowed to 4.4% in Q from 4.8% in Q1 2013, which was below expectations. The trade deficit remained flat at USD12.3bn in July, from USD12.2bn in June. Exports improved significantly, rising 11.6% YOY in July, while imports fell 6.2%. The trade deficit is now running significantly below the 12-month average of USD16.6bn, largely given the sharp drop in gold imports and coupled with weak non-oil/non-gold imports, which have been falling sharply as well.

4 NEUTRAL ON SINGAPORE BONDS; WE CONTINUE TO UNDERWEIGHT INDIA AND MALAYSIA Remain underweight on overall portfolio duration Given the overall rising rate environment we maintain our underweight on duration. However, we are neutral on Singapore duration since the market has underperformed US Treasuries recently, due to the long end supply towards August end. We expect some support for Singapore government securities on Syrian tension and firmer US Treasuries. We remain neutral to slightly underweight on Indonesian bond duration in spite of their attractive yields and recent strong demand seen in local auctions. In the current environment, we are wary of further capital outflows, inflation concerns and a high percentage of foreigners holding the country s debt. India s structural dual deficits (current and fiscal), along with high inflation and low growth, keeps us wary and we continue our underweight on the country. Our Underweight on Malaysia duration is based on general weakness in Emerging Markets. Additionally, Malaysia is the other country in Asia which has a significant portion of their government bonds held by foreigners, making it vulnerable to foreign selling on US tapering expectations. We are cautious on Asian currencies with weak external balances We are wary on Current account deficit currencies like the Indonesian Rupiah and the Indian Rupee, as well as on small current account surplus currencies like the Malaysian Ringgit and the Thai Baht. Given the high current account surpluses in Korea, the Philippines and Singapore, we expect the Korean Won, the Philippine Peso and the Singapore Dollar to outperform other Asian currencies. On account of the current weak sentiment in emerging markets, we are holding more US Dollar cash than usual.

5 ASIAN CREDITS PACE OF OUTFLOWS FROM EMERGING MARKETS HAS PICKED UP Asian credits weighed down by rising yields and concerns over India and Indonesia In August, rising US Treasury yields significantly contributed to negative returns for Asian high-grade credits. Mounting concerns over the Fed tapering of the Quantitative Easing (QE) program weighed on markets. 10-year US Treasury yields reached a high of 2.93% before ending the month at around 2.78% from around 2.58% at the end of July. Asian high-grade returned -1.93% as spreads widened by 23bp. Asian credit spreads came under pressure given mounting concerns over the deteriorating macroeconomic developments particularly in India and Indonesia. Worries over their weakened growth profiles, current account and fiscal deficits, and elevated inflation rates, led to steep declines in the INR and IDR and local currency bonds which also impacted the USD denominated issues. Corporates outperformed Sovereigns in high-grades; high-yields beat high-grades High-grade corporates outperformed high-grade sovereigns given the higher duration of the sovereign segment and the sell-off in the Indonesian USD denominated sovereign bonds. Long-dated Indonesian sovereign bonds declined by around 12 points as spreads widened and US Treasury yields rose. Indian banks and corporates came under severe pressure with spreads widening as much as 100bp intra-month. Indonesian and Indian high-yield corporate bonds also weakened in tandem. However, Asian high-yield outperformed their high-grade counterparts, declining by 0.57%, given their lower correlation with US treasury returns, shorter-duration, and higher carry. EM debt outflows accelerated but supply was light Market technicals continued to erode as Emerging Market (EM) debt outflows continued in August. For the four weeks ending 28 August, EM hard currency fund outflows amounted to around USD 1.7bn 1. However, supply for the month was light given the market volatility and onset of the summer lull. There were only four issues amounting to USD 1.5bn issued in the high-grade space. The high-yield primary market remained largely sidelined. Pressure points to remain; retain defensive positioning The Fed s taper of the QE program, synchronized macro weakness across many Emerging Markets (EM) countries with accompanying fund outflows, and tensions in the Middle East will continue to weigh on Asian credits into September. With tightening onshore liquidity and increasing demand for USD funding in a number of Asian countries, the Asian credit market is also likely to be challenged by a burgeoning pipeline of new issues. The increasingly differentiated spread performance of late between the better quality credits vs. their lower rated peers where most of the supply is likely to originate also gives pause 1 EM Strategy Comment, Weekly Fund Flows and Technicals, Morgan Stanley, EPFR, 29 August 2013

6 to any inclination of increasing the allocation to lower-rated credits. We will maintain a more defensive positioning across both dimensions of duration and credit risk. India and Indonesia to remain focal points of concern in Asia While the tone of Asian credit markets has been weak, the main drivers of the spread widening moves have been the weakness in Indian and Indonesian credits rather than generalized weakness across the region. This differentiated performance is likely to continue. The weakness surrounding Indian and Indonesian credits is also likely to persist as long as broader macro concerns remain an overhang. While we remain cautious on credits from both countries, further discrimination among credits is even more necessary at this juncture. Of concern are highly leveraged corporates with significant foreign currency liabilities are likely to come under further pressure as the local currency depreciates and as on-shore liquidity tightens. Important Information: This document is for information only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. Any securities mentioned herein are for illustration purposes only and should not be construed as a recommendation for investment. You should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you. Investments in unit trusts are not deposits in, obligations of, or guaranteed or insured by Nikko Asset Management Asia Limited ( Nikko AM Asia ). Past performance or any prediction, projection or forecast is not indicative of future performance. The information contained herein may not be copied, reproduced or redistributed without the express consent of Nikko AM Asia. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, Nikko AM Asia does not give any warranty or representation, either express or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. Nikko AM Asia accepts no liability for any loss, indirect or consequential damages, arising from any use of or reliance on this document.