Photographer: Dimas Ardian/Bloomberg

If Trump Reflation Doesn’t Work, Emerging Asia Offers Appeal

Updated on
  • ‘Funds are flowing back’ to Asia amid lure of higher yields
  • Spurt of junk-rated bond issuance shows investor appetite

As disillusion sets in among U.S. Treasury traders about the Trump administration’s mixed progress on reflating the American economy, one major beneficiary is becoming apparent: emerging Asia.

The world’s fastest-growing region offers higher yields and stronger domestic growth stories that are already attracting a renewed influx of capital, with yield premiums on junk-rated bonds hovering near the three and a half year-low reached last month. Herald Van Der Linde, HSBC Holdings Plc’s head of equity strategy for the Asia-Pacific region, said shares in China, India and Indonesia could see gains of at least 10 percent this year should a “reality check” set in among investors over U.S. President Donald Trump’s policies.

In the U.S., benchmark 10-year Treasury yields have been whipsawed this week, slipping to 2.34 percent on Wednesday, only to rebound last session to 2.40 percent as Trump promised a “phenomenal” plan to overhaul business taxes. Treasuries were boosted earlier in the week after Laurence D. Fink, chief executive officer of BlackRock Inc., the world’s biggest fund manager, warned there’s a greater chance of 10-year yields dipping below 2 percent because some U.S. fiscal stimulus policies won’t be in place until 2018.

“The funds are flowing back to Asia” with U.S. inflation-adjusted rates less attractive, said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management Co., which oversees about $8.9 billion of assets. “Asia’s emerging markets will need funds for infrastructure and other projects, and have many countries that have a current-account surplus. Now, the real rates in Asia look good again.”

The Wednesday rally in Treasuries bolstered demand for bonds in the Asia-Pacific region Thursday, with Australian 10-year yields touching their lowest level since November and equivalent New Zealand yields slipping to a three-week low after that country’s central bank cited uncertainty in the global outlook in its decision to hold interest rates at a record low.

Trump offered no details on his tax plans, which along with concern over the outlook for tighter monetary policy from the Federal Reserve will likely underpin the dollar against developing-nation currencies in Asia, Qi Gao, a currency strategist in Singapore at Scotiabank, wrote in a client note Friday. The Korean won led losses in early trading, slipping at least 0.2 percent with the Thai baht and the Taiwanese dollar. Australian and New Zealand government bond yields rose for the first time this week.

Emerging Asian economies including South Korea still have vulnerabilities. They are reliant on exports and the Trump administration’s policies on trade aren’t yet clear. The American budget process has also yet to begin in earnest, so Treasury yields could swing back to gains in the medium term -- taking the dollar with them.

But for now when it comes to Asia, bond issuers are among those enjoying a boost. Almost $6 billion of junk-rated debt has been sold in the region so far this year, the highest volume since the same period of 2013, according to data compiled by Bloomberg.

Pipeline Building

“From the supply side, the pipeline has been building up -- but not excessively to crowd the market as they are mostly for refinancing -- while from the demand’s point of view, funds have decent cash levels, inflows and bond redemption,” Zhi Wei Feng, executive director, credit trading at Standard Chartered Plc, said in an interview.

In the case of a significant correction in U.S. markets, Van Der Linde at HSBC suggests buying Chinese stocks that are more likely to react to domestic developments -- such as selected retailers and alternative energy producers like solar or wind generators. Speaking in an interview Monday, he also recommended large-cap banks in India and consumer and automotive names in Indonesia.