SINGAPORE (Apr 9): As global markets struggle with market volatility from the Covid-19 pandemic, fundamental resilience in fixed income assets from Asian emerging markets (EM) have seen analysts predict a quick economic turnaround in the second half of 2020.
While the pandemic has led to short-term pessimism within global fixed income asset markets, analysts from asset management firm PineBridge Investments argue that investors have priced in an “armageddon scenario” that is unlikely to occur in reality. All things being equal, strong longer-term fundamentals and an unprecedented amount of fiscal and monetary stimulus will likely see Asian EMs experience a robust rebound within the year.
“EM countries continue to follow prudent macro-prudential measures to ensure that credit channels remain open and liquidity remains sufficient in their respective markets,” said Steve Cook, Co-Head of Emerging Markets Fixed Income at Pinebridge’s London office.
“We’ve already seen in many EM countries aggressive rate cuts and similar credit support programmes...as we have seen in developed markets,” said Cook at an online webinar on Wednesday.
Cook observes that many EM companies have been actively deleveraging in the past three years. Last year, many undertook aggressive debt buybacks to pre-fund the debt maturing this year and onwards. As a result, the debt levels of many of these companies are deemed manageable. “EM goes into this latest test of its resilience from a position of strength,” said Cook.
Asian EMs are therefore in a strong position to inject timely monetary stimulus into the economy. Relatively strong balance sheets in Asian EMs are supported by low oil prices arising from the Russia-OPEC oil price war, giving central banks more leeway for monetary easing.
“The fall in oil prices is actually a positive for almost all Asian countries. For one thing, with the exception of Malaysia, almost all other Asian countries are net oil importers,” commented Arthur Lau, co-Head of Emerging Markets Fixed Income and Head of Asia ex-Japan Fixed Income at PineBridge Hong Kong, “The fall in oil prices should benefit such countries as import costs will be lower...the sharp fall in oil prices should be able to mitigate some downward pressure on business demand.”
Asia’s strong institutional investor base has moreover contributed to Asian credit market stability, allowing Asian bonds to enjoy strong fundamentals, valuations and technicals and higher risk-adjusted returns relative to other major asset classes. Government ownership of firms in strategic sectors such as oil and gas has also contributed to the credit resilience of many major issuers, with Asia’s credit outlook and sovereign growth rates to remain broadly positive.
China’s rapid recovery from the crisis could also have positive spillover effects on EM recovery in Asia, since economic growth from this Asian powerhouse has a largely positive correlation with growth rates in regional economies. As Chinese production and consumption levels slowly normalise with the gradual relaxing of internal lockdown measures and Beijing’s introduction of a CNY1 trillion ($201.7 billion) fiscal stimulus package, exports from other Asian EMs into China are also likely to improve.
“In fact, as the demand shock in Europe and America is likely to continue for some time, Chinese recovery will become more meaningful to other Asian economies. While we should expect rather miserable economic data in the first half of 2020 for most Asian countries, with China looking to have a more constructive recovery in 2HFY20, Asian economic outlook for the second half should also be more positive,” added Lau.
Despite these encouraging signs, however, Lau warned that overall Chinese growth for 2020 would likely decline by half from an anticipated 6.1% to only 3% due to the pandemic lasting longer than expected.
The analysts also sought to debunk fears that weaker health systems in EM countries would struggle to cope with the pandemic. PineBridge’s sovereign analysts have discovered that several of the larger EM countries showed a similar level of preparedness in the range between the G10 average and the least-prepared G10 country, Italy.
Cook noted that most EM countries enjoy the advantage of a relatively younger demographic and lower population density relative to more urbanised developed countries, which is likely to blunt the impact of Covid-19. Many EM countries also benefit from the experience of controlling infectious diseases such as SARS and ebola, giving them valuable experience in managing the outbreak of Covid-19.
With economic uncertainty and widespread pessimism keeping investors at bay, PineBridge is encouraging clients to seize the opportunity to pick up undervalued assets at a bargain.
“The recent sell-off in the market has created a very attractive investment opportunity for medium to long-term investors...We believe that the credit spread has priced in excessive default risks and rating downgraded risks,” Lau commented, “Current spread levels are too high and do not reflect the healthy credit profile of the Asian issuer and the constructive near-term outlook of Asian economies. ”
“Such sell-offs always creates opportunities for active managers to capitalise on these dislocations...we believe that the level of expected defaults we are now pricing in already - is materially above even our most bearish economic scenarios,” echoed Cook, though he noted that asset managers would have to “pick carefully between winners and losers” as such opportunities would not be found evenly throughout fixed income asset markets.
As periods of uncertainty can often challenge one’s fundamental understanding of relative value, PineBridge argues that it is more important during such situations to value an asset through its credit fundamentals and liquidity. It advises that investors look out for cash positions, facilities available, and upcoming maturities when analysing a potential fixed income asset investment.
