Against this benign global macroeconomic backdrop, we view that the US Federal Reserve can afford to pick up its pace of tightening, which could bring Fed Fund rate to around 1% by the end of 2016. While this projected Fed tightening trajectory appears to be more aggressive than what the market is currently pricing in, it is still a fairly moderate gradient of rate increases. Beyond potential short-term volatility, we expect Asian bond markets to be able to withstand the impact of such measured rate increases, helped partly by their attractive bond carry.
If what we anticipate about a global recovery comes to pass, this could usher in a 6 -12 month period where EM Asian bond markets and currencies see a period of recovery from the battering it took in 2015. While the greenback could still be supported by the Fed monetary policy bias, there remains room for a rebound in selected Asian currencies, which we view to be oversold in 2015. In the Asian hard currency bond market, the widening of credit spreads in 3Q 15 have also brought pockets of opportunities for investors.
Nevertheless, we are mindful that return expectations for the Asian bond and currency markets need to be weighed against the backdrop of a less favourable US interest rate cycle and the prevailing fragilities the global economy. However, general market experience tells us that with the concerns priced into the financial markets, it reduces the likelihood of a market crisis. Coupled with our expectation of a benign macroeconomic environment, 2016 could well be a year where Asian currency and bond markets deliver fairly attractive returns as investors scale this “wall of worry”.
