China inside out: onshore and offshore bond opportunities
Consider the income potential of China as inflation looms and rates stay low.
The global economy went through an unusual recession in 2020, one that was sharp and short. In the first half of 2020, the economy bottomed but also regained most of the losses.
Looking forward, the economy will likely continue to recover through 2021, but the pace of recovery in each location will likely be dependent on how the economies tackle the global public health crisis. While uncertainties persist, investors could keep track of growth, policies and sector performance as they embark on their investment journey.
Growth: Asia’s long-term growth trends continue
The use of vaccines has been relatively uncommon among China’s population, mainly because of little awareness about public healthcare and limited vaccine supply. Nonetheless, the current crisis has sparked near-term demand, and this could help increase market penetration of various healthcare-related services and products over the long run.
Meanwhile, mobility restrictions are changing daily life as more people are staying home longer. The digital wave has reached the shores of various Asian markets. Already, there are a number of promising eCommerce or payment unicorns in Southeast Asia and India, and we believe that in time, these companies could go public and further diversify Asia’s equity markets.
Policies: accommodating policy that supports risk assets
As demand-side inflation is unlikely to pick up drastically in developed economies, major central banks could likely maintain accommodative monetary policy.
Amid low rates, we believe this would create a constructive backdrop for risk assets such as equities and corporate bonds. And Asia is among one of the preferred avenues for growth opportunities as demographic changes and urbanisation are driving the region’s long-term structural growth development.
Sector performance: diversifying across equities and bonds
While equity markets have made impressive gains since the trough in March 2020, this recovery has been uneven. At the end of October, markets in the Association of Southeast Asian Nations (ASEAN), Europe and Japan were still down relative to the start of 2020.
Within Asia, the market is overall driven by new economy sectors such as technology and healthcare. As Asian economies gradually relax mobility restrictions, this is likely to help expedite trade recovery, bolstering corporate performance and Asia’s stock markets.
Earnings growth by sector across Asia2
2. EMD stands out amid a weak US dollar1
The search for yield continues to attract international capital into Asian fixed income, considering the interest rate differential between developed market fixed income and their Asian counterparts. In particular, the onshore China bond market is opening up to international investors, and this broadens active investing opportunities in Chinese corporate and government bonds.
3. Securitised debt’s role in diversification1
In 2020, US Treasuries (UST) played a less significant role in helping investors manage market volatility. Not only have yields fallen below 1%, and therefore do not generate income for investors, but their traditional negative correlation against equities also weakened considerably.
Other than traditional fixed income sectors, securitised debt such as asset-backed securities and mortgage-backed securities can be a part of the overall portfolio. They generally have lower correlations with equities but provide slightly better yields than UST. Based on investors’ investment objectives and risk appetite, those with long-term investment horizons could also consider alternative assets such as real estate, infrastructure and transportation assets, which could present relatively attractive income opportunities with low correlation to global equities.
Yields and correlations of fixed income returns to equities3
As 2021 approaches, the global economy is likely to continue its recovery, but the pace of each location would depend on how the global public health crisis unfolds. As recoveries are likely to be uneven, investors, based on their investment objectives and risk appetite, could keep track of growth momentum, policy development and sector performance, and allocate assets flexibly as they seek investment opportunities in a ‘new normal’.