As at December 2013

Asian fixed income quarterly review and outlook Client note
As at December 2013


1 Asian credit markets delivered positive returns over the quarter. China and India outperformed, while Thailand and Singapore lagged. High yield corporates produced the strongest returns over the quarter, while quasi-sovereigns were the poorest performers.
Review
Asian credits started the quarter positively, boosted by the US Federal Reserve’s (Fed) decision in late September to maintain asset purchases at current levels. Market performance was underpinned by strong primary issuance and positive economic data out of China despite the uncertainty associated with the US government shutdown. However, during the quarter Asian credit markets experienced some volatility as rising global bond yields pushed credit spreads wider. To add to this, weaker than expected economic data from Indonesia and India weighed on sentiment. At quarter end, stronger than expected employment data in the US and confirmation that the Fed will commence tapering its asset purchases in January 2014 drove credit spreads tighter. However the reduction in asset purchases resulted in upward pressure on bond yields. The JPMorgan Asia Credit Index (JACI) returned 1.57% over the December quarter, and the average spread of the JACI tightened by 36 bps to 263 bps. India was the strongest performer of the major countries within the JACI over the quarter, posting a return of 2.78%; while Thailand (0.50%) was the poorest performer. The JPMorgan Asia Credit Investment Grade Index (JACI IG) returned 1.09% over the quarter, with the average spread tightening by 29 bps to 196 bps. India was also the strongest performer in the JACI IG, posting a return of 2.55%; while Singapore (0.38%) was the poorest performer. The economic headwinds facing Indonesia and India were a key stress point for Asian markets during the quarter. Economic data out of India was mixed, with high inflation and disappointing industrial production countered by a narrowing of the trade deficit. Early in the quarter, data showed that
India’s current account deficit widened by less than market expectations in the June quarter, with the deterioration largely attributable to a combination of contracting exports and rising imports. Indonesia reported a small improvement in its current account deficit during the quarter, however the central Bank Indonesia believes structural reforms such as diversified energy supplies and new oil production will be required in addition to monetary policy actions in order to generate sustainable results. China contributed positively to returns over the quarter. A spike in the inter-bank lending rate (the interest rate at which Chinese banks can lend to one another) mid-quarter led to concerns about alack of liquidity in the banking system, however this was short-lived. Economic data released during the quarter indicates that growth is slowly picking up, and the government’s reform agenda should have a positive impact over the longer-term.
Thailand’s performance during the quarter was subdued, with political tensions dominating the news. There is a risk that the prolonged uncertainty may impact on economic growth, which is already hampered by high levels of household debt and declining exports.

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