Western Asset Management, the leading global fixed income manager wholly owned by Legg Mason, Inc., said that continued slowdown in the global economy and the subsequent policy reactions will likely remain the dominant theme in Asia. Growth in China will be an important factor for regional economic performance in 2009 given China’s role as an export market for many Asian countries.
The global fixed income manager, however, pointed out that although the infrastructure components in the recently announced policy actions by the Chinese government are expected to benefit other Asian countries, Asian economies will still see significantly slower growth in 2009 as regional exports to the United States, Europe and Japan slow dramatically. Tighter global credit markets will continue to impact funding opportunities for those companies that rely on the international capital markets.
“Asia is in a much healthier financial position now than it was during the 1997-98 crisis and at current levels, all sectors of Asian local bonds look attractive,” said Rajeev De Mello, Head of Asian Investment at Western Asset.
He added that such factors have made Asian local bonds attractive. According to De Mello, government bonds have rallied but monetary policy will likely remain loose and inflation should be dampened by lower commodity prices and weaker growth. Also, sovereign and corporate bonds have been affected by capital repatriation and forced selling, and will likely benefit as positions are reallocated between investors.
To add to these factors, default rates in Asia remain low whereas the current prices of Asian corporate bonds imply an unprecedented surge of failures over the next few years. Cash-rich Asian corporate issuers have begun to buy back some of their outstanding bonds at extremely cheap levels that increased the attractiveness of Asian local bonds.
In terms of Asian currencies, Western Asset’s outlook for the short term is more mixed as certain countries will likely allow their currencies to fall, in order to soften the adverse impact on their export markets. However, it remains positive on Asian currencies in the medium term as the region is likely to rotate its growth away from the export sector towards domestic sectors. As that happens, the attractiveness of weaker currencies to stimulate growth will diminish.
“Despite the recent stabilisation, Asian corporate bonds still offer significant opportunities in a range of sub-sectors and countries and some of the highest liquidity premiums, with the best macroeconomic fundamentals. In terms of risk-aversion, I believe that we have already seen the worst of that,” De Mello concluded.
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