Could we see more monetary easing by Asian central banks?
The economic fallout from the Coronavirus outbreak is expected to become more significant for the rest of Asia in the weeks ahead. The resumption in manufacturing production in China is likely to be delayed, as workers struggle to get back to work after the Lunar New Year break. This would imply parts of the Asian and global supply chains could be disrupted. The auto manufacturing sector is already facing shortage of components. Moreover, demand from Chinese consumers are also hurting selected sectors in Asia, such as tourism.
Asian central banks have been very active in policy easing in 2019 to counter the negative impact from the U.S.-China trade war and growth deceleration in China. With economic momentum stabilizing in late 2019, we argued that global central banks can take a break in cutting rates. That said, Asian and emerging market central banks have more room to cut, if needed, than their developed market counterparts. For example, some Asian and emerging market long-term government bond yields (10-year for example) are still positive in real terms, or after subtracting inflation. In developed markets, long-term bonds yields are mostly negative in real terms. (Exhibit 1)
The latest outbreak is putting pressure on Asian central banks. China is leading the group with a 10bps open market operations rate cut on February 3. It has also launched a special lending program making funding available, via commercial banks, to sectors that are combating the outbreak. We expect more sector-specific rate cuts and required reserve reduction to come in the weeks ahead to dampen the damage on the economy, as well as facilitate recovery once the outbreak comes under control.
Meanwhile, central banks from the Philippines and Thailand also opted to cut their policy rates by 25bps. Both central banks cited the outbreak as one of the factors for their decisions. The Monetary Authority of Singapore has reiterated that its policy stance, using Singapore dollar’s (SGD) exchange rate as policy lever, instead of interest rates, is appropriate but there is room for the Singapore dollar to weaken within the current framework.
Not all Asian central banks are easing just because of the coronavirus outbreak. The Reserve Bank of India has offered to inject USD 14billion cash through one-year and three-year funding operations, similar to the European Central Bank’s Long-Term Refinancing Operations. This is to address the tight liquidity condition and hope to provide the economy greater support, even as there are only 3 confirmed cases in India at the moment.
In sum, our view of more monetary easing by Asian central banks in 2020 have proved to be correct so far. The coronavirus outbreak has accelerated these easing and possibly exacerbated the magnitude in weeks and months ahead.
EXHIBIT 1: real and nominal yields
Source: FactSet, various central banks, J.P. Morgan Asset Management.
*Real yield is calculated based on the 12-month average Consumer Price Index for each respective market covering data 31/12/18 – 30/12/19. Nominal yields are the 10-year government bond yield for each respective market. Past performance is not a reliable indicator of current and future results.
Guide to the Markets – Asia. Data reflect most recently available as of 31/01/20.
Investment implications
Further monetary easing by Asian central banks will create more challenges for Asian investors as cash return continues to fall. Even as more rate cuts are now being priced into the Asian government bond yields, their carries are still attractive relative to developed market government bonds. In the latest bout of risk aversion since mid January, high yield Asian currencies, such as the India rupee and Indonesia rupiah, have held their ground relative to the U.S. dollar. In contrast, currencies with high export dependency, such as the Singapore dollar and South Korean won, have been under more pressure. Overall, the prospects of more rate cuts in Asia imply Asian fixed income could be an asset class that could provide diversification benefits to Asian investors during the current period of economic uncertainties. In addition to government bonds, high quality corporate debt can also remain resilient.
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