partner content

Asian Bond Watch: How the markets have performed in 2018

State Street Global Advisors’ Asia Pacific head of fixed income, Kheng-Siang Ng explains why the region’s bond markets continue to outperform their global counterparts.
Asian Bond Watch: How the markets have performed in 2018
Kheng-Siang Ng

As the end of the year draws nearer, 2018 will likely to be characterised as a challenging one for emerging markets (EM) bonds.

In recent months, it has been the turn of global emerging market bonds to experience unsettling bouts of volatility, driven by a number of macro developments, including US rate hikes, a strong US dollar, tighter monetary policies globally, escalating trade tensions, and potential contagion from Turkey and Argentina. All these factors are seemingly unfavourable to EM bond markets.


Despite the undeniable gravity of some issues facing certain emerging market economies, taking a closer look at the EM bond markets reveals Asian bonds outperform their EM peers year-to-date1 when markets are challenging. This is due to the fact that they offer lower volatilities and better return/risk ratios. The attractions of investing in local currency debt are still apparent in Asia, which has been relatively insulated from events developing elsewhere.

While investors’ risk appetite had a clearer direction in 2017, so far in 2018, it has alternated between risk-on and risk-off. Investors shifted into cash, and allocations to equity, fixed income and multi-asset funds decreased, while allocations to money market funds increased year-to-date.


In State Street Global Advisors’ view, US dollar movements and volatility will remain the key risks for EM bonds in the near term. The US dollar is likely to be underpinned by further monetary tightening from the US Federal Reserve, with an additional rate hike expected in December and another three to four increases anticipated in 2019.

It’s likely that the current period of quantitative tightening to run for a while yet – especially given that Europe, Japan and the UK are so far behind the US in their progression towards tighter conditions – but we do expect interest rates to peak at a far lower level than in previous cycles. This means the higher yields on offer in Asian market debt can remain relatively attractive.

Other risks include issues bedevilling countries such as the Philippines, Turkey and Argentina which are not going to vanish overnight. Although the escalating global trade dispute between the US and China is cause for concern, the recent agreement on a new version of NAFTA between the US, Canada and Mexico offers some cause for optimism.


In the past, shake-outs in EM bond and equity markets were short and sharp, followed by a long and gradual recovery. In a rush for the exits, indiscriminate selling has typically pushed entire markets down, and this has been particularly evident in EM bonds because of the perception of higher risk. This, in turn, has created opportunities for vigilant long-term investors.  

Overall, the fundamentals of the EM story have remained mostly unchanged. For Asia in particular, strong secular economic growth rates, favourable demographics, better fiscal positions and improving credit ratings all remain intact.

For shrewd investors prepared to take a longer-term view, recent upheavals may present an opportunity. EM currencies are beginning to look undervalued against the US dollar, and yield spreads have spiked higher, offering an attractive entry point.

Following the global financial crisis, very few investors had the nerves to invest in EM bonds, but those who did were richly rewarded.

Within the EM debt universe, for example, Asian local currency bonds are certainly more stable than bonds from some Latin American countries and carry many of the same attractions but fewer of the risks. Asian economies are now more rigorously sandbagged, and less vulnerable to the disruptive forces that have beset them over the past few decades. Economic growth and reforms have produced better functioning markets that, importantly, are now less reliant on overseas investors to fund deficits.

Investors in emerging market debt have a choice of hard or local currencies. Some have expressed concern over foreign exchange, worried that the biggest uncertainty in the local currency space is currency. Historically, currencies have been a significant contributor to Asian local currency bond returns, as represented by the iBoxx ABF Pan Asia Index, with annualised currency returns since January 2001 having contributed 1.61% to the total Asian local currency bond return2. In State Street Global Advisors’ view, local currency investment may offer the potential to fully benefit from growing Asian economies by capturing both bond market returns and currency gains.

Please click here for the latest insights and investment ideas for Asian fixed income.

1. Source: Bloomberg, as of 31 August 2018

2. Source: Markit iBoxx ABF Pan-Asia Index, as of 30 September 2018. Index returns reflect capital gains and losses, income, and the reinvestment of dividends. Past performance is not a guarantee of future results.


All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone. Past performance is not a guarantee of future results.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

The views expressed in this advertisement are the views of Kheng Siang Ng through the period ended 12 October 2018 and are subject to change based on market and other conditions. This advertisement contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

This document has not been reviewed by the Securities and Futures Commission of Hong Kong (the "SFC").

Singapore: State Street Global Advisors Singapore Limited, 168 Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore) • Telephone: +65 6826-7555 • Facsimile: +65 6826-7501 • Web:*

Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong •  Telephone: +852 2103-0288 • Facsimile: +852 2103-0200 • Web:*

© 2018 State Street Corporation - All Rights Reserved. 2276635.1.1.APAC.RTL. Exp. Date: 10/31/2019

*This website has not been reviewed by the SFC.


¬ Haymarket Media Limited. All rights reserved.