Emerging Asia back in fashion for now

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

The 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, head of Asia Pacific equity strategy for HSBC, said shares in China, India and Indonesia could see gains of at least 10% this year should a “reality check” set in among investors over US President Donald Trump’s policies.

Laurence Link, CEO of BlackRock Inc, the world’s biggest fund manager, warned there was a greater chance of 10-year US Treasury yields dipping below 2% because some US fiscal stimulus policies won’t be in place until 2018.

“The funds are flowing back to Asia” with US inflation-adjusted rates less attractive, said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management Co. “Asia’s emerging markets will need funds for infrastructure and other projects, and have many countries that have a current-account surplus.”

The rally in Treasuries bolstered demand for bonds in 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 the 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, said Qi Gao, a currency strategist in Singapore at Scotiabank.

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 in 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.

“From the supply side, the pipeline has been building up — but not excessively to crowd the market as they are mostly for refinancing,” said Zhi Wei Feng, head of credit trading at Standard Chartered.

In the case of a significant US correction, Van Der Linde at HSBC recommends Chinese stocks tied to domestic factors — such as retailers and alternative energy producers. He also likes large-cap banks in India and consumer and automotive names in Indonesia.