Bloomberg, Feb 27, 2015
This year was tipped to be the one when U.S. interest-rate increases would suck money from emerging markets. It’s not turning out that way in Asia.
Unprecedented economic stimulus from Europe to Japan has prompted investors to pump a combined $14.4 billion into Indian, South Korean and Indonesian local-currency government debt this year, the most on record for the three markets, exchange data show. That’s helped cut the average yield on emerging-market sovereign notes in Asia by 21 basis points to 4.19 percent, compared with the 4.72 percent for developing nations globally.
The flows underscore the growing investor conviction that as the Federal Reserve prepares to raise U.S. borrowing costs for the first time in nine years, Asia is best-placed to weather the impact. While falling oil prices are supporting the external balances of nations from India to Turkey, political and corporate scandals in Brazil and Argentina are sapping confidence in Latin America and the crisis in Ukraine is fueling a cash exodus from Central Europe.
“Unlike emerging-market Europe and Africa and Latin America, Asia is comparably free of political uncertainty,” Yerlan Syzdykov, who helps oversee the equivalent of $239 billion as head of emerging markets at Pioneer Investment Management Ltd. in London, said in a Feb. 16 e-mail. “Although an increase in U.S. interest rates will generally affect emerging-market countries negatively, we may still see outperformance from Asian bonds.”
Local-currency sovereign debt in Asia has returned 2.3 percent this year, led by an 8.4 percent advance in Indonesia and 2.6 percent gain in China, Bloomberg indexes show. Latin American securities lost 0.4 percent, while those in Europe, the Middle East and Africa fell 0.7 percent.
Funds focused on Asian bonds attracted $1.1 billion this year through Feb. 20, a reversal of the $654 million in outflows in the same period of 2014, according to EPFR Global. Latin American funds attracted $44 million, while those from Europe, Middle East and Africa had withdrawals of $48 million.
Futures contracts indicate there’s a 59.5 percent chance that the Fed will start raising interest rates before the end of October, compared with 46.5 percent at the end of January.
The European Central Bank said Jan. 22 it would buy 60 billion euros ($68.13 billion) of debt a month through at least September 2016, while Bank of Japan in October raised its annual target got enlarging the monetary base to 80 trillion yen ($672 billion). More than a dozen monetary authorities from Australia to China to Canada have eased policy this year.
“The influence of the Fed and its eventual tightening cycle is diminished at least in the near term” as funds unleashed by central bank easing need to find a home, HSBC Holdings Plc strategists led by Hong Kong-based Andre de Silva wrote in a Feb. 12 report.
Overseas investors have pumped $5.35 billion into India’s local-currency bonds so far in 2015, the biggest amount at this stage in any year going back to 1999. Indonesia’s sovereign debt has attracted 46.99 trillion rupiah ($3.7 billion), the most since at least 2002, and South Korea’s $5.34 billion of inflows compare with $2 billion for the same period in 2014.
A 45 percent drop in the price of Brent crude since June has benefited most Asian economies, Thiam Hee Ng, a senior economist at the Asian Development Bank in Manila, said in a Feb. 13 e-mail. Indonesia all but eliminated fuel subsidies from Jan. 1, while India ended controls on diesel and raised natural gas prices in October.
Russia, already facing international sanctions related to the conflict in Ukraine, has been buffeted by the decline in crude prices. In Brazil, a kickback scandal ensnaring state-controlled oil producer Petroleo Brasileiro SA is roiling the nation’s financial markets and prompting renewed calls for the impeachment of President Dilma Rousseff.
“Asia is kind of a safe haven within the emerging markets,” Ben Sy, the Hong Kong-based head of fixed income for Asia at JPMorgan Chase & Co.’s private-banking unit, said in a Feb. 17 interview. “Emerging markets as a whole aren’t doing well. For Latin America, the default rate will increase as many of their bonds are energy-related or involve companies linked to an ongoing corruption investigation. Eastern Europe is close to Russia and Ukraine.”
The extra yield offered by Indonesia’ 10-year bonds over similar-maturity U.S. Treasuries narrowed by 59 basis points this year to 504, data compiled by Bloomberg show. That was the biggest drop in the region, followed by a decline of 28 basis points for the Philippines to 192 basis points.
Manulife Asset Management Ltd. says it’s cautious on Asian bonds because yields are likely to climb when the Fed starts raising rates in the second half of the year, according to Endre Pedersen, who helps manage $45 billion as chief investment officer for Asian fixed income outside of Japan.
“Rates are still going to hurt you massively,” Pedersen said in a Feb. 10 interview in Singapore. “We are very much cautious on rates.”
The Philippines, Vietnam and Sri Lanka are the most probable emerging-market candidates for credit upgrades, Regis Chatellier, a strategist at Societe Generale SA in London, said in a Feb. 17 research note.
“I don’t think there will be a large pull-out” when the Fed raises borrowing costs, said ADB’s Ng. “The market has mostly priced in the rate rise. The gains in Asian sovereign local bonds this year likely reflect improving macroeconomic fundamentals.”
Analysts are cutting projections for Asian bond yields, Bloomberg surveys show. The median forecast for China’s 10-year rate at the end of 2015 was 3.46 percent in a monthly poll published Thursday, down from 3.95 percent in November. India’s was seen at 7.4 percent in January, 60 basis points lower than predicted two months earlier. Current levels for the two nations are 3.36 percent and 7.74 percent, respectively.
Asia is luring global funds because its currencies are the least volatile among developing nations, while there are prospects for deeper rate cuts in India and China, according to HSBC. The People’s Bank of China lowered benchmark interest rates in November for the first time since 2012, followed by the Reserve Bank of India with a surprise cut in January.
“Higher U.S. Treasury yields are about Number 324 on my list of concerns,” Edwin Gutierrez, who helps oversee $13 billion of emerging-market debt as a money manager at Aberdeen Asset Management Plc in London, said in a Feb. 20 e-mail. “In a world where every other central bank is cutting and more countries head to negative interest rates, I don’t worry about the overall global liquidity situation.”