As the Ukraine situation escalated on 24 February, we saw a knee-jerk reaction that initially weakened global credit markets before they stabilized and then partially recovered overnight. The next day, some follow-through weakness in Asian credits remained, but the widening was contained within the 5–15 basis point range. Investors are mostly sitting on the sidelines as they await further updates. The weak sentiment also spilled over to the Asian high-yield (HY) market—particularly non-China credits that had already been pressured by global HY since the beginning of the year.
On the currency front, risk-sensitive currencies, such as the Korean won and Thai baht, underperformed and were weaker against the U.S. dollar. Meanwhile, the Indian rupee was the most negatively impacted by higher energy prices. Conversely, the Malaysian ringgit was relatively stable as it tends to outperform in periods of elevated energy prices.
Asia’s credit fundamentals remain largely intact. Having said that, in the near term, investment sentiment should remain driven by global risk appetite and further geopolitical developments. As such, it’s important to stay nimble and actively manage portfolios to insulate them from broad risk aversion and position them to capitalize on the return of risk-on sentiment. We were positioned more defensively ahead of recent market events, allocating more weight to higher-rated Asian credits and tactically extending portfolios’ duration.
Top-down regional analysis
On the back of higher oil prices, Asian markets, such as Indonesia and India, may see pressure from higher energy import bills. However, these should be partially offset by exports of other commodities. Historically, these markets have demonstrated higher volatility amidst uncertainties.
Indonesia’s local bond market has been most susceptible to outflows in previous risk-off events driven by global risk aversion. Yet, foreign ownership is now half that of pre-pandemic levels, which has notably decreased volatility amongst local-currency bonds, and we saw a modest softening over the past week.
In addition, we expect China government bonds will likely experience little impact, supported by monetary-policy easing and the bonds' safe-haven properties (see the China Fixed Income Team’s investment note).
Bottom-up credit views
Asian issuers generally don't have direct exposure to Ukraine or the surrounding area, so any direct impact was limited. On the contrary, specific regional names may benefit from higher commodity prices and the constrained supply of basic materials in Europe. We remain positive on Asia dollar credits and have diversified across high-quality names. That said, we’ve been cautious of Asian currency volatility.
We believe China will still be the key value driver within the Asian HY space, which may have a lower correlation with the broader market. Given the relative strength of China’s economy and its robust trade position, we see a better chance for Chinese credits to outperform and weather any potential shock in the broader space, especially the high-quality state-owned issuers.
We also think that the global geopolitical uncertainty will likely be a non-event for most Chinese credits. For example, China’s property sector dynamics are locally driven—that is, they’re primarily driven by policy updates and developers’ interaction with local and international creditors.
While the unfolding Russia-Ukraine crisis is expected to create significant short-term volatility, the uncertainty may potentially result in entry points to add to value names.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment
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