Outlook 2019 - Asian Fixed Income: Stay liquid, stay invested

Outlook 2019 - Asian Fixed Income: Stay liquid, stay invested

As we expect volatility to remain elevated in 2019, we believe that staying nimble and liquid is critical to generating good returns. In an uncertain market environment, it’s important to be patient.

1. Market volatility should remain elevated.
2. A reduction in headwinds could be tailwinds, and vice versa.

What is your investment outlook for Asian fixed income in 2019?

Our outlook for financial markets is now more cautious, in view of risks in the current late-cycle environment. Tightening US monetary policy, slowing Chinese growth and trade issues present headwinds to the global economy and financial markets.

The latest Fed dot plot suggests a slightly ‘restrictive’ monetary policy in the near term, which should remain supportive of US dollar strength and weigh on emerging and Asian markets.

Against this backdrop, high-quality, short-dated investments should continue to see strong demand, with valuations looking attractive in Asia, especially in the high yield segment.

That said, these valuations also reflect the risk in tighter offshore US dollar liquidity and onshore China credit conditions, which is why bottom-up credit selection has become increasingly important, even for short-dated credits.

Inflation-linked and floating rate instruments should remain supported for the first half of 2019, as the US economy is still gathering momentum.

What do you think could most surprise investors next year?

Headwinds from the US-China trade war, Brexit, Italian political woes and a strong US dollar all continue to weigh on risk sentiment. If there is an improvement in any of these situations, risk assets could stage a rebound, while any worsening could drive global markets down.

The US and China should remain on centre stage, with these two countries playing the biggest part in driving the trajectory of global growth in 2019.

If the US Federal Reserve’s stance remains unchanged in the next few months, the market is likely to adjust accordingly and push Treasury yields even higher, which could induce more volatility in risk assets and emerging markets.

Treasury yields are rising

China is slowing down faster than its government has intended, as it balances long-term gain and short-term pain. If China can find an efficient way to channel credit to privately-owned enterprises, which were previously financed by shadow banking, a smoother transition could be attained. However our base case is that this could take time.

How do you plan to capture the best opportunities?

Our portfolio aims to have high credit quality (A-/BBB+), with a short duration generally less than 1 year - what will vary will be the portfolio’s instrument breakdown.

We have recently reduced our allocation to high yield bonds and increased our allocation to floating rate notes. Our geographical allocation has also been rebalanced to a more global distribution, as compared to a previously heavier tilt towards Asia.

BRYAN COLLINS is a portfolio manager based in Hong Kong at Fidelity International. He joined Fidelity in 2006 as a fixed income trader and became lead portfolio manager for Asian high yield in 2009. Prior to joining Fidelity, Bryan held a variety of roles in Credit Suisse Asset Management in Sydney, starting as a client consultant responsible for fixed income in 2000, before eventually becoming senior trader for fixed income and foreign exchange.

 

 

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