Asian credit spreads should remain volatile amid an increasingly protracted trade tension between China and the US.
The impact of the additional tariffs to the Chinese economy and the broader impact to other Asian countries remain a concern even as the Chinese authorities have undertaken targeted measures to stabilise its economic growth.
This is according to Koh Liang Choon, head of fixed income for Asia at Nikko Asset Management.
Meanwhile, worries over twin deficit countries have mounted over developments in the broader emerging market (EM) space, particularly those in Turkey and Argentina.
What’s more, continued weakening of local currencies and bonds from countries such as Indonesia and India should continue to weigh on sentiment towards hard currency issues from these countries, at least in the very near-term.
Having said that, the economic fundamentals for countries like Indonesia and India have improved since the taper tantrum in 2013, as acknowledged by the sovereign rating upgrades since.
Meanwhile, the primary market for Asian credit issuances that had re-started after sentiment stabilised in August is likely to continue into this month, and this should limit any scope for spread tightening in the secondary market, Koh said.
Within the Asian local government bonds sector, Koh said Nikko AM continues to prefer Malaysia and Chinese bonds.
Malaysian government bonds offer relatively attractive and stable real yields. Unlike other central banks in the region who are raising interest rates, Bank Negara Malaysia is expected to remain in the periphery in the near-term.
Meanwhile, Chinese policymaker's resolve to inject money into the economy to support growth should be supportive of prices for Chinese bonds.
On currencies, Koh said Nikko AM expects the Thailand Baht (THB) to outperform the Indian Rupee (INR) and Indonesian Rupiah (IDR).
Investor focus on challenges for funding India and Indonesia's current account deficits are likely to put pressure on the INR and IDR.
On the other hand, Thailand’s large account surplus should allow the THB to be relatively resilient vis-à-vis peers. Hawkish comments from Thai government officials will also provide support for the THB.
‘We are cautious of the Indian rupee and Indonesian rupiah and expect the THB to outperform regional peers amid the weak tone in markets,’ Koh said.