Pulse on Asia

Asia's financial markets offer a compelling structural story that began more than 20 years ago.

Asia Economic Outlook

Explore PIMCO's macro insights on the Asian economy

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Asset Class Outlook

 

CREDIT

The sentiment in Asian credit remains weak with the cloud of the U.S.-China trade tensions affecting corporate confidence and poor equity market performance reducing one channel for fund raising. The easing expected from China relating to infrastructure has not yet materialized, while the government’s attitude to deleveraging remains firm so far. We are monitoring redemptions from dedicated funds for selling pressure in the secondary market. Supply can be an overhang with the pipeline looking full and limited incremental demand likely to be seen without significant concession.

 

RATES

The Bank of Japan (BOJ) is looking to normalize its monetary policy stance in the medium term. While imminent changes to policy parameters are unlikely, we expect the BOJ to allow the yield curve to move higher with a steepening bias. We expect the Reserve Bank of Australia to begin a gradual tightening cycle from H2 2019. In this context, front end valuations look rich with the first full rate hike not priced until the middle of 2020. In emerging Asia, we expect fixed income markets to remain broadly anchored in current ranges, but also see an asymmetric risk of a move higher as U.S. Treasury yields adjust to a relatively strong growth momentum and a rise in core inflation. Led by the People’s Bank of China (PBOC), we expect central banks in the region to maintain an accommodative monetary policy stance in an effort to counter the negative growth impact coming from higher trade tariffs.

 

CURRENCY

We remain cautious on emerging Asia FX. Growth and export momentum have already peaked in the region. For most countries in Asia, new export orders and purchasing managers’ indices (PMIs) have already softened in the last 12 months. As the Fed continues to hike rates, global financial conditions have tightened. Portfolio flows have turned mixed, in both fixed income and equities. On the Chinese yuan (CNY), the PBOC will tolerate more volatility in the exchange rate (i.e. “no line in the sand”) as it looks to preserve FX reserves. In this context, the exchange rate will react to both a diverging policy stance between the Fed and PBOC, and export compression due to tariffs.

Investment Ideas

A snapshot of PIMCO's investment approach to fixed income investing in Asia.

Disclosures

Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Equities may decline in value due to both real and perceived general market, economic, and industry cond