We continue to favor emerging and Asian country bonds with a high real rate differential relative to developed markets. We expect inflation to remain moderate in most emerging markets, and the fundamental underestimation of emerging market currencies supports this view. In Asia, Thailand is expected to underperform. Thai sovereign yields in LC are low relative to emerging markets and should be gradually re-evaluated alongside US Treasuries.
Sovereign bonds in foreign currency (HC): the Philippines underperform
We also remain supportive of emerging market bonds as they offer attractive sovereign rate spreads beyond what their sovereign fundamentals could justify. Emerging market growth appears to have bottomed out and the economic recovery in China will most likely keep it in the coming quarters. In Asia, we put the Philippines underperforming given the long duration of our neutral duration position on US Treasuries. In addition, the port relative to the EM mark is weak. We also returned to China's neutrality, as we expect higher-yielding emerging markets to outperform as idiosyncratic risks and the stability of the US dollar diminish.
Asia FX: The USD stumbles
The convergence of more accommodating expectations for US interest rates and lower crude oil prices has resulted in a decline in USD / Asia exchange rates over the past month. However, we would be cautious of forecasting a prolonged decline at the same pace, as market expectations of US interest rates could already be exceeded and the price of oil is more likely not to continue to rise.
Asian FX vs. US Dollar – Depreciating Currencies Bounce Back From Lower Oil Prices
It should be noted, however, that the global growth situation – and therefore the Fed's policy – is still evolving and will most likely remain very dynamic. Thus, our expectations regarding USD / Asia exchange rates may need to be reassessed fairly frequently in the coming months.
The INR and IDR benefit from a lower oil
For USD / IDR and USD / INR, both the interest rate environment and the oil price helped lower our 3M targets (to 14,000 and 71.0 respectively), in addition to the neutrality of the INR compared to the previous negatives. Indonesia and India are due to hold general elections – scheduled for April 2019 and April-May 2019 respectively – but the risk of political uncertainty seems higher in India at the moment. In addition to politics, it also seems likely that the Indonesian Bank will be a little less accommodating than the Reserve Bank of India. The former should also be less aggressive in buying US dollars, given Indonesia's higher short-term external debt-to-equity ratio.
The US-China trade agreement is now more likely
Elsewhere, trade negotiations between the United States and China seem to have gone fairly well and it seems that the volatility of the US markets has increased pressure from both sides to reach an agreement. Of course, the process will continue to keep pace, but at the very least, it seems to be going in the right direction. USD / CNY, on the other hand, had already fallen relative to previous mergers, and we are not considering a significant decline as current levels are in line with what is needed to cancel the plan. current tariff, which should be blocked. -in the new agreement. The USD / CNY will also likely be backed by China's promises to reduce the bilateral trade imbalance and by expansionary fiscal and monetary policy. We see the pair at 6.85 and 7.00 in 3 and 12 months, respectively.
This part of the document: (i) aims to provide comments on the macroeconomic market; (ii) contains no representation or advice regarding a specific negotiable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other services.