Summary
A bearish longer-term outlook for the US dollar could bolster Asian economies as they continue their tentative recovery from the Covid-19 pandemic.
Key takeaways
|
While the halo effect of China’s ongoing growth story is a major influence on other Asian economies, US fiscal and monetary policy also has a significant effect on these countries. Given the bearish outlook for US interest rates, Asian emerging markets (EM Asia) could benefit from a weaker US dollar.
While the US dollar continues to offer a potential safe haven for investors, and has benefited accordingly, there are concerns about the fiscal health of the US. The US has spent heavily on recovering its economy from the Covid-19 pandemic, with total fiscal stimulus that could end up being 40% higher than similar interventions elsewhere in the world, assuming a fourth stimulus package is eventually passed.
This is starting to point towards a more depressed outlook for the US currency – which could be positive for EM Asia.
A weakened US dollar could boost Asia’s emerging markets
There are several reasons why ultra-low US interest rates and a structurally weak US dollar are positive for EM Asia:
- The resulting positive real yield (yield after inflation) offered in EM Asia could prove attractive to international bond inflows. Although Asian central banks have also cut rates to support their domestic economies in the wake of the Covid-19 pandemic, the region is still able to offer positive real yield to investors.
- Stronger EM Asia currencies relative to the US dollar could help improve Asia’s balance of payment position, attracting capital inflows and reducing the foreign-debt burden. This is particularly beneficial to economies like Indonesia, India and the Philippines, which need foreign inflows to finance their current account deficits (the gap between the value of imports and exports) and which have higher foreign-currency-denominated debt. EM Asia economies generally have increased their US dollar debt over the past decade, particularly in the private sector, so a weaker US dollar would help reduce the foreign currency debt stock, and service burden.
- A weaker US dollar would reflect the relative outperformance of emerging markets (EMs) compared with developed markets; this outperformance could also be the result of stronger global trade. We anticipate that the weakening of the US dollar is likely to coincide with the world economy gradually stepping out from the impact of Covid-19, and global trade recovering from its current state.
The dollar is far from the only factor that will determine EM Asia’s economic success. For example, each economy’s relative success in containing the pandemic will be critical in driving Asian economies’ macro performance.
To this end, we maintain our view that North-East Asian economies like China, South Korea and Taiwan – which are included in the MSCI Emerging Markets Index and so classed as EMs – are leading the region. They have managed to get Covid-19 largely under control while their domestic economies have been able to recover and resume normal operation without excessive stimulus support – either fiscal or monetary.
Investment implications
EM equities generally tend to outperform those in developed markets during periods of US dollar weakness, and EM Asia is no exception. The DXY (US Dollar Index index tracks the dollar’s value relative to the currencies of the US’s most significant trading partners. Historically it has been negatively correlated with the relative equity performance of EMs versus developed markets. Although this negative correlation has somewhat weakened in recent years, it continues to support our view that the relative strength of EM currencies versus the US dollar reflects both the global business cycle and the growth fundamentals of the EM world.
We would also expect EM credit spreads (the difference in yield between EM securities and US bonds) to tighten during periods of US dollar weakness. Historic data suggest that EM credit spreads are inversely correlated with EM currency strengths and commodity prices. As such we maintain our recommendation that investors increase exposure towards good-quality corporate credit in Asia.
1369259
Want to view more?
Summary
US investment strategist Mona Mahajan explains how the US presidential election has not delivered the anticipated Democratic blue wave, and markets have been jolted by how close the race now appears.
Key takeaways
|
-
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bond prices will normally decline as interest rates rise. The impact may be greater with longer-duration bonds. Credit risk reflects the issuer’s ability to make timely payments of interest or principal—the lower the rating, the higher the risk of default. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan];and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.