Western Asset extols fiscal stimulus programmes
Western Asset Management, the global fixed income manager owned by US-based Legg Mason, believes the recently announced fiscal stimulus programmes combined with the immediate impact of lower interest rates will help stabilise the investment environment.
Global risk appetite should return and benefit the riskier asset classes, the fund house says, adding this should benefit Asian currencies as equity outflows may stabilise or reverse themselves.
"Stronger Asian currencies will be supportive for those countries looking to further reduce interest rates, and lower risk aversion will be positive for US dollar-denominated Asian bonds," says Rajeev De Mello, Singapore-based head of Asian investment at Western Asset. "Asian sovereign and corporate bonds should further benefit from improved liquidity in the US dollar funding markets."
The global fixed income manager believes that there are two opposing forces currently driving global government yields.
On one hand, central banks have signalled their intent to hold policy rates at extremely low levels for some time. The US Federal Reserve and the Bank of England have announced programmes to purchase their long-dated government bonds directly. Other central banks have announced various forms of direct market intervention in their capital markets. This prompts yields to fall.
On the other hand, governments are pushing through fiscal stimulus packages that could require heavy issuance and potentially drive yields higher. Asian governments have been slower to reduce policy rates due to the inflation scare experienced in the first half of 2008. Regional central banks are likely to continue reducing policy rates as earlier inflation reverses, aided by lower commodity prices and growth that is falling below potential.
"We have seen a significant convergence in regional yield curves and look to remove some of the underweighted countries. A number of Asian countries offer significantly higher yields than US Treasuries," De Mello says. "During the first quarter, we moved to an overweight position in Hong Kong dollar bonds and in Thai government bonds. We continue to be overweight Korean government bonds."
While Asian corporate bonds have rallied significantly over the past three months, Western Asset still believes that they offer value and continues to hold them. It remains positive on the outlook for Asian currencies in the medium term.
"Recent new issues have demonstrated a moderation in risk aversion and have benefited from Asian interest in regional issuance. Many high-yielding Asian corporate bonds are different from their counterparts in the US and Europe, as they are among the largest local companies and benefit from close links to major banks and to the government," De Mello says.
Several companies successfully raised money through loans or equity placements, De Mello notes, such as Indonesia's Telkomsel mobile phone operator, South Korea's chip maker Hynix and Indonesia's oil producer Pertamina. Other companies accessed their domestic bond markets such as the Philippines' food and beverage company San Miguel and Thailand's mobile phone company True Corporation.
Among currencies, Western Asset continues to remain overweight the Chinese yuan as it disagrees with the market pricing that China will allow its currency to depreciate. It increased its overweight on the Korean won by purchasing the won against the Thai baht.
Western Asset believes global policy measures to increase liquidity in the financial system should have a greater positive impact on Asia as investors continue to look for regions of the world with higher economic growth. Lower interest rates, a greater use of unconventional monetary measures and capital increases at the International Monetary Fund and the Asian Development Bank are all positive for the region, the fund house adds.
"Over the medium term, Asia is likely to rotate its growth away from the export sector towards domestic sectors. As that happens, policymakers should see less benefit from weakening their currencies to stimulate export growth," De Mello says. "Asian central banks are also increasing their mutual support through bilateral currency swaps. Such agreements allow individual central banks to tap vast regional reserves should they need to defend their currencies. Overall, we remain positive on Asian currencies in the medium term."