Potential implications of the U.S. presidential election on Asian fixed income

On Tuesday, November 3, 2020, U.S. voters decided who would hold the balance of power in Washington. President-elect Joe Biden was declared the winner of the election (November 7), and at the time of this writing, (November 16), President Trump hasn’t formally conceded defeat.¹ Overall, assuming current expectations hold, that is a Biden presidency and split U.S. Congress, we believe the outcome of the U.S. presidential election should be constructive for Asian fixed income.

We believe greater clarity and policy consistency are the greatest benefits

After months of nonstop campaigning and a hard-fought election, we believe that clarity is one of the greatest benefits that an outcome can bring to the markets. Indeed, there was substantial volatility and uncertainty in the run-up to early November, and the election outcome has catalyzed a rally in risk assets. We expect this to continue over the short term and believe it should—particularly—benefit emerging-market (EM) assets, including Asian fixed income.  

Where Asia is concerned, we envisage that a Biden administration might bring greater policy consistency. Over the past four years, U.S.-China relations have progressively worsened, particularly economically, punctuated by a prolonged trade dispute that brought unexpected policy changes that fueled bouts of market volatility. Although we don’t expect a significant improvement in the U.S.-China relations over the near term, we believe the possibility exists for more stable, consistently communicated foreign and economic policy from Washington. This should be positive for Asian fixed-income markets that had previously suffered from volatile policy swings and uncertainty over future actions.  

This has created a more favorable macro backdrop for Asian fixed income, which should be underpinned by accommodative monetary policy globally and a weaker U.S. dollar. In the aftermath of the COVID-19 pandemic, global central banks slashed interest rates to cushion the impact of the economic downturn. We expect monetary policy in developed markets to remain accommodative over the near term, particularly in the United States where the U.S. Federal Reserve’s (Fed’s) recent revision of its inflation-targeting framework led Fed officials to signal that interest rates should remain near zero over the next two to three years.²

In our view, an expansionary Fed will likely be coupled with more active U.S. fiscal policy. Separately—while the ultimate scope and quality of the expected stimulus package will depend on President-elect Biden’s relationship with Congress—additional federal spending (and an escalating federal deficit) with lower interest rates should put pressure on the U.S. dollar.  We believe that select Asian currencies, such as the Chinese renminbi and South Korean won, may benefit from this dynamic. 

Asian fixed-income fundamentals remain intact in a post-U.S. election world

In a post-U.S. election world, the fundamentals of Asian fixed income remain intact—diversified economic growth, resilient credit performance, and relatively attractive nominal and real yields.  

The outbreak of COVID-19 dented economic prospects and roiled financial markets across the globe. Asia was no exception—regional economies contracted in the second quarter due to administrative lockdowns and reduced consumption in Western markets. In our opinion, the region still boasts some of the best economic prospects globally due to its economic heterogeneity and diversified growth models.

According to the latest forecasts from the International Monetary Fund, although Asia’s GDP is expected to experience its worst downturn in recent history, surpassing even the Asian Financial Crisis (1997/1998), the rate of its contraction is expected to be the smallest of all major regions. Crucially, Asia is expected to have the strongest economic rebound globally in 2021.³

Resilient credit performance (so far)

The region’s economic performance coupled with its unique credit structure are reasons why Asian credit has remained relatively resilient.  

During the first quarter of 2020, when global markets experienced sharp volatility, Asian investment-grade (IG) credit only fell 0.50%, while their U.S. (-4.1%) and EM (-8.6%) peers posted larger losses.⁴

Asia’s unique IG structure provides one plausible explanation for this divergence in performance: The J.P. Morgan Asian Credit Index (JACI) is largely composed of IG credits (77%). Furthermore, a significant component of the Asian credit market (about 40%) is state-owned enterprises and quasisovereign entities that have access to greater economic resources, including government support and bank loans. 

Overall, we believe that Asia won’t be immune from the general trend of credit deterioration globally—rating downgrades and defaults are expected to gradually rise over the next two years, although at a relatively lower level in Asia than other regions.⁵ The risk of fallen angels (credits downgraded from IG to non-IG rating) in Asia, although present, should also be more subdued when compared to other global markets.⁶

Attractive rate differentials in Asia

Finally, Asian bonds can offer relatively attractive nominal and real yields compared with their developed-market counterparts. U.S. Treasuries and European sovereign debt are currently yielding below 1%, with some returning negative real yields.7 In contrast, sovereign bond yields across Asia remain higher—such as in China, Malaysia, and Indonesia—with limited levels of inflation.⁸

Chart showing yields of Asian and developed market market sovereign bonds as of November 13, 2020. The chart shows that Asian sovereign bonds offer significantly higher yields when compared with their developed markets counterparts.

The Asian yield premium can also be observed when comparing U.S. dollar-denominated Asian IG corporate bonds with U.S. and European IG corporate bonds. 

Chart comparing investment-grade bond yields offered by Asian corporate bonds with yields offered by U.S. and European investment grade bonds, as of November 13, 2020. The chart shows Asian U.S. dollar denominated investment grade bonds offers yields of 3.08% while their U.S. equivalent offered 2.03%, and their European peer offered 0.39%.

Conversely, higher real interest rates could also imply that there may be room for monetary easing. With inflation at bay, nominal interest rates in select parts of Asia could do with further monetary easing, which is supportive of select bond prices. 

Conclusion

Assuming the current base case expectations for the U.S. presidential election plays out, we envisage a positive impact on Asian fixed income.  The clarity of the results coupled with the possibility of improved policy consistency from Washington should be well received by markets as investors can now focus on fundamentals and take advantage of the growth and rate differentials uniquely present in Asia.

 

On Saturday, November 7, 2020, The Associated Press declared Joe Biden as the victor in Pennsylvania at 11:25 a.m., Eastern time. The victory won him the state’s 20 electoral votes, pushing him over the 270 electoral vote threshold needed to prevail; “Biden Declares Victory, Calls on Americans to Mend Divisions,” Bloomberg, November 8, 2020; “Donald Trump refuses to concede defeat as recriminations begin,” The Guardian, November 7, 2020. 2  “Fed Signals Low Rates Likely to Last Several Years,” Wall Street Journal, September 16, 2020. IMF 2020 Outlook (October version): “Asia and emerging Asia” is forecast to contract by 1.7% in 2020, the smallest rate of contraction among global regions. ”Low-income developing countries,” as a category, is forecast to contract less at 1.2%, but this category comprises markets aggregated from across the world. In 2021, “Asia and emerging Asia” is projected to grow 8.0% in 2021—the highest rate of any region. The J.P. Morgan Asia Credit Index represents Asia IG credit performance, while the JP Morgan Corporate Emerging Market Bond Index represents EM fixed-income performance, and the ICE BofA U.S. Corporate Index represents U.S. IG credit performance. 5 Moody's baseline scenario predicts a trailing 12-month Asia Pacific (APAC) high-yield nonfinancial corporate default rate of 6.0% in 2020, up from 1.1% in 2019. Standard and Poor’s, as of June 30, 2020. The APAC region only recorded one fallen angel so far through the first half of 2020. 7 The 10-year U.S. Treasury yielded 0.90% as of November 12, 2020. 8 The Indonesian 10-year government bond yielded 6.30% as of November 13, 2020. 9 Bloomberg, as of November 13, 2020. 

 

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Endre Pedersen

Endre Pedersen, 

Chief Investment Officer, Global Emerging Markets Fixed Income & Deputy Chief Investment Officer, Global Fixed Income

Manulife Investment Management

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Murray Collis

Murray Collis, 

Deputy Chief Investment Officer, Fixed Income, Asia ex-Japan

Manulife Investment Management

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