HALISTER1: ASIA ROUNDUP: JPMorgan, HSBC See Inflows as Fed Hike Path Slows

ASIA ROUNDUP: JPMorgan, HSBC See Inflows as Fed Hike Path Slows

(Bloomberg) -- Fed’s decision to hold interest rates and scale back expectations for increases in 2017 will sustain inflows into high-yielding Asian bonds and currencies, according to fund managers and analysts.
  • Won and ringgit led a rally in Asian currencies, while debt in the region saw yields decline. Australia, Thailand and South Korea’s 10-yr yields drop by 8-9 bps
  • More asset managers and hedge funds may set up dedicated EM currency and bond funds, according to Commerzbank
  • NOTE: Fed’s dot plot shows officials expect one 25-bps rate increase this year, followed by two next year. In Jan., it was showing four hikes for 2016 followed by another four in 2017
  • NOTE: South Korea, Thailand, Indonesia and Malaysia have seen a combined net inflow of $36.5 billion into their debt markets so far this year
BONDS:
  • JPMorgan Asset Management (Stephen Chang, head of Asian fixed income)
    • Asia FX and bond markets are taking comfort today from Fed’s policy meeting
    • Expects path of higher Fed interest rates to be quite shallow and this means the demand for Asian bonds are likely to remain strong
    • Asian bond market are therefore likely to digest Fed hikes, and any increase in yields may be seen as a buying opportunity
  • Commerzbank (Peter Kinsella, head of EM economic & FX research)
    • EM bonds are “here to stay” because Fed policy suggests there’s unlikely to be any aggressive dollar appreciation
    • There’s talk of a Dec. rate hike given the hawkish guidance for Dec. but at the margin that doesn’t make a huge difference to the EM story; investors looking for higher-yielding assets still relevant
    • Expects to see more asset managers and hedge funds setting up dedicated EM currency and bond funds, both in local and hard currencies
    • Likes Indonesia and India bonds
  • Bank of Ayudhya (Roong Sanguanruang, market analyst)
    • Thailand’s bond yield curve follows flattening move in the UST after FOMC, putting more downward pressure on yields in the longer-end of the curve
    • Rate increase may be gradual although sees risk that fund inflows to slow when the Fed takes action
    • Expects a rate increase in Dec., which “is far” from being fully priced and that’s why sees scope for dollar strength
  • DBS (Eugene Leow, fixed-income strategist)
    • Combination of easing bias by Bank of Indonesia and the “on hold stance” by the Fed renders conditions positive for Indonesia’s bonds
    • Markets are also relieved that the Fed put in “a much slower rate-hike profile” for 2017
CURRENCIES:
  • HSBC (strategists Daragh Maher and Clyde Wardle)
    • Emerging FX is likely to rally on improvement in risk appetite and relief that Fed hasn’t surprised, particularly as such currencies have become rather volatile of late
    • High-yielding IDR, INR, ZAR and COP may fare well, while HSBC’s ’barbell’ strategy continues to recommend some low yielders such as KRW and TWD, which enjoy enviable current account surpluses
    • In G10, USD is expected to weaken notably vs “risk on” currencies such as AUD, NZD and SEK
  • Scotiabank Asia (Gao Qi FX strategist)
    • Excess global liquidity will continue to support EM Asian currencies, led by won and ringgit
    • Fed likely to maintain size of its balance sheet in year ahead, while BOJ and ECB will continue to expand theirs at a steady pace
    • Potential market uncertainty such as results of U.S. presidential election will spur demand for safe-haven assets, providing support to USD and JPY from time to time
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Clyde Wardle (HSBC Bank USA NA/New York NY)
Daragh Maher (HSBC Holdings PLC)
Eugene Leow (DBS Group Holdings Ltd)
Peter Kinsella (Commerzbank AG)
Qi Gao (Bank of Nova Scotia Asia Ltd/Singapore)

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