Monthly Outlook June 2015 Summary Yields of US Treasuries (USTs) rallied in May, with the 2-year and 10-year yields up 4 and 9 basis points (bps) respectively as compared to end-april levels. During the month, China s central bank lowered its benchmark lending and deposit rates by 25bps each. Elsewhere, Indonesia s credit rating outlook was changed to positive from stable by Standard & Poor s (S&P) on improved policy credibility. Koh Liang Choon Head of Fixed Income Nikko AM Asia Limited Volatility for Asian credit picked-up in May as risk-free rates volatility spiked. Overall, Asian investment grade credits declined 0.23% in the month, while Asian high-yield credits gained 0.5%. New issuance was heavy in May. In the investment grade space, there were a total of 15 new issues totalling USD 15.5bn. Within the high-yield space, there were 12 new issues amounting to USD 4.15bn. We are positive on Indian and Thai government bonds as we expect the respective central banks to continue leaning towards a looser monetary policy. On the other hand, we maintain a slightly cautious outlook on Korean bonds. On currencies, we continue to favour RMB as the Chinese authorities is actively lobbying to have the RMB included in the International Monetary Fund s (IMF) basket of Special Drawing Rights (SDR). In contrast, we remain underweight on SGD, MYR and KRW. Volatility of returns is likely to remain high as volatility in risk-free rates have picked up significantly. Within Asia, with continued signs of growth moderating across a number of countries, the expectation for further easing could support near-term sentiment. Meanwhile, we expect the supply of new issuances to remain high again in June with China investment grade issuing the majority.
ASIAN RATES AND FX Market Review Yields of USTs rallied in May The UST yield curve shifted higher in May, with the 2-year and 10-year yields up 4bps and 9bps respectively, compared to end-april levels. The sharp rise in German bunds yields which started in April continued to lead the sell-off in global fixed income this month. Oil prices rose, resulting in higher inflation expectations, adding to the downward pressure in bond prices. Bonds sentiments stabilised in the later part of the month as the European Central Bank (ECB) reiterated its commitment to maintaining asset purchases to reach their inflation target, and also on comments that the ECB intends to front load its asset purchases in May and June ahead of an expected low-liquidity period in the summer. HSBC Asian Local Bond Index (ALBI) For the month ending 31 May 2015 For the period from 31 May 2014 to 31 May 2015 ALBI Thailand Taiwan South Korea Singapore Philippines Malaysia Indonesia India Hong Kong China Offshore China -1.5% -4% -2% 0% 2% ALBI 0.2% Thailand Taiwan South Korea Singapore Philippines Malaysia Indonesia India Hong Kong China Offshore China -20% -10% 0% 10% 20% Bond FX Bond FX Note: Bond returns are in local currencies while FX and ALBI returns are in USD. Past performance is not necessarily indicative of the future performance. Source: HSBC Asian Local Currency Bond Indices, Bloomberg, 31 May 2015 CHINA CUT INTEREST RATES FOR THIRD TIME IN SIX MONTHS China delivered another cut in interest rates In May, the People s Bank of China (PBoC) loosened monetary conditions further, lowering its benchmark lending and deposit rates by another 25bps each, to 5.1% and 2.25% respectively. This move followed a 100bps universal cut in banks reserve requirement ratio in April. On top of this, the central bank further lifted the maximum regulatory deposit rate pricing to 1.5x from 1.3x the benchmark rates, while keeping the demand deposit rate unchanged. S&P s upgraded Indonesia s sovereign outlook to positive Indonesia s structural improvement had been affirmed by S&P as the rating agency upgraded the sovereign outlook from Stable to Positive. According to S&P, the new administration had improved fiscal flexibility by reducing fuel subsidies and boosting revenue collection. Other initiatives include strengthening land acquisition laws, streamlining investment licensing, reforming tax incentives and also various efforts to deepen Indonesia's capital markets and strengthening its financial system.
Thailand proposed budget for 2016 with strong investment plans Thailand government has proposed budget for 2016 (starting 1 October 2015) that entails increasing spending on investment to the highest level in 7 years, in an attempt to boost domestic growth and offset weakening exports. Investment Budget has been targeted to increase by about 20% for fiscal year 2016 and is mostly concentrated on projects for water management, basic infrastructure, road connectivity and school buildings. Malaysia, Indonesia and Philippines recorded weaker growth in 1Q15 The Malaysian economy grew 5.6% year-on-year (YoY) in 1Q15, slightly below the 5.7% growth recorded in the preceding quarter. While external demand weighed on output; domestic demand was robust. In particular, consumer spending gained traction, expanding 8.8% YoY from the previous quarter s 7.6% growth. Growth in the Indonesian economy was weaker than expected at 4.7% in the first quarter of 2015, slower than the 5.0% rise in the previous quarter. Domestic demand and declining exports served as the main drag. Lastly in Philippines, 1Q15 GDP grew at 5.2%YoY, lower than the 6.6% achieved in the previous quarter. The deceleration in headline growth came on the back of softer public sector momentum and external demand. Despite disappointing growth, the strong investment share of 23.4% of GDP implies better quality of growth that may improves jobs and incomes. EXPECT INDIA AND THAILAND TO CONTINUE LEANING TOWARDS A LOOSER MONETARY POLICY Market Outlook Overweight India and Thai government bonds; slightly cautious on Korean bonds We maintain our overweight view on Indian and Thai government bonds, and cautious outlook on Korean bonds. We are of the view that the Bank of Thailand will continue to lean towards a looser monetary policy, as the pace of recovery remains anaemic. Similarly, as underlying inflationary pressures remain muted amid lingering weak growth momentum, we expect the Reserve Bank of India to continue with monetary easing. On another hand, we maintain a slightly cautious outlook on Korean bonds on the back of heavy issuances pipeline of mortgage-backed securities and also amid the chance of a supplementary budget that may be announced in the coming months. Favour RMB; cautious on SGD, MYR and KRW We continue to favour the RMB, and hold an underweight view on the SGD, MYR and KRW. The Chinese authorities pursuit of the RMB s internationalisation, as it actively lobbies for inclusion of the currency in the IMF s SDR, should continue to provide support for the outperformance of the currency vis-a-vis its regional peers. To add, Chinese authorities had mentioned that the RMB remains stable and there is no intention to devalue the currency. Meanwhile, we remain underweight on SGD, MYR and KRW. We believe SGD will remain a preferred funding currency due to its low yield, and its high correlation to EUR will add pressure to the Singapore dollar. We expect MYR to continue to be dragged down on concerns over its reserves and fiscal positions. Moreover, a potential rating downgrade by credit rating agency Fitch may further impact the weak sentiments of Malaysian ringgit. Lastly, we expect KRW to underperform due to the country s weak growth and its currency s high correlation with JPY.
ASIAN CREDITS Market Review ASIAN INVESTMENT GRADE CREDITS DECLINED 0.23% IN MAY, WHILE ASIAN HIGH- YIELD CREDITS GAINED 0.5% Volatile month for Asian credits as USTs yield volatility picked-up Volatility for Asian credit picked-up in May, especially for investment grade credits, as risk-free rates volatility spiked. USTs yields gapped higher early in the month led by a sell-off in European bonds driven by concerns over excessive valuations and an improving economic outlook in Europe. The 10- year UST note yield rose to a high of 2.35% from 2.03% at the beginning of May before recovering and ending the month at 2.14% as the US economic data remained mixed. For most of the month, Asian credit spreads tightened as higher risk-free rates attracted buying. However, sentiment waned towards the end of the month amidst concerns over stretched valuations and as Chinese equities turned weaker. For the month of May, Asian investment grade credits declined 0.23% with spreads widening by 3bps. On the other hand, Asian high-yield credits outperformed, gaining 0.5% as rising risk-free rates had a more muted impact given their spread cushion. Continued signs of policy easing in China also lent support to Chinese high-yield credits. JP Morgan Asia Credit Index (JACI) Daily Returns for the period from 31 May 2014 to 31 May 2015 107 106 105 104 103 102 101 100 99 98 JACI JACI Investment Grade JACI High Yield Note: Returns in USD. Past performance is not necessarily indicative of the future performance. Source: JP Morgan, 31 May 2015 Further easing from China; S&P raised its sovereign outlook on Indonesia As mentioned in the Asian Rates and FX section, China continued on its easing path, with the PBoC lowering the one-year lending rate and one-year deposit rate by 0.25% each to 5.1% and 2.25% respectively. The easing measures continued to support sentiment toward China related credits. Separately, Indonesian sovereign spreads was under pressure despite S&P revising Indonesia s sovereign rating outlook from stable to positive as concerns remained over the country s sluggish growth and the pace of reforms and infrastructure spending.
New issues was heavy in May New issuance was heavy in May, with activity picking up across investment grade and high-yield with the majority of the issuance again from China. In the investment grade space, there were a total of 15 new issues totaling USD 15.5bn during the month. Within the high-yield space, there were 12 new issues amounting to USD 4.15bn. Market Outlook EXPECT SUPPLY OF NEW ISSUANCE TO REMAIN HIGH IN JUNE Volatility of returns to stay high as risk-free rate volatility rises Volatility of returns, especially for investment grade, is likely to remain high as volatility in risk-free rates have picked up markedly. This is likely to continue as we edge towards a potential rate hike by the US Federal Reserve (Fed) in 2H2015 with the April Federal Open Market Committee minutes indicating that the US Fed is of the opinion that the recent soft patch is temporary. Within Asia, with continued signs of growth moderating across a number of countries, the expectation for further easing could support near-term sentiment. New issuance pipeline likely to remain robust The expectation is for the supply of new issuance to again be high in June with China investment grade issuing the majority even as the pace of high-yield issuance from China has picked up in recent weeks. This could put a cap on the amount of spread compression in secondary issues even as the Chinese authorities continue to ease policy. 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.