A security guard walks in front of an image of the US Federal Reserve. (Reuters Photo/Kevin Lamarque)

Asia Investors Steer Through Slipstream of Fickle Fed


SEPTEMBER 25, 2016

Singapore. Having weathered almost two years of volatility spurred by a fickle Federal Reserve, most long-term investors in Asia's emerging markets barely blinked this week as the Fed once again redrew the future path of US interest rates.

Fund managers have poured money into Indian and Indonesian bonds steadily and have bought equities in Taiwan and Southeast Asia in 2016, notwithstanding the Fed's fluctuating stance on the rates trajectory.

When and how rapidly the Fed moves away from its decade-long near-zero rates is serious matter in a region that's hugely dependent on dollar funding.

This week, the Fed hinted it was much closer to raising rates for the first time since last year in December, while also indicating a much slower pace of rate rises in 2017 than markets had priced in.

That was a stark shift from December when US borrowings costs were expected to be raised four times this year alone.

So, the conviction that even the most hawkish Fed scenarios only mean a gradual rise in rates, and that the world is set for an extended period of low inflation and growth has investors staying put in Asia - the relatively less volatile, better performing and more stable of the world's emerging markets.

"The idea that yields are going to be lower for longer is now much more consensus than it was two years ago," said Omar Slim, a fixed income portfolio manager with $42 billion of assets under management in Asia.

"Even if the Fed hikes, those factors are strong enough to keep fixed income markets reasonably strong."

That faith was evident in July, soon after the shock outcome of Britain's vote to leave the European Union, when anxiety over a global recovery ran deep and expectations were for the Fed to keep rates steady for the next two years.

As markets fell in South Korea, which is one of Asia's most volatile, fund managers rushed in to buy the Korean won, its government bonds and stocks.

"The market will fluctuate between slight extremes of being complacent and not pricing in enough risk and, on the other side, pricing in too much risk and that is exactly where some of the opportunities arise in the Asian space, particularly in currency markets," says Kenneth Akintewe, senior investment manager at Aberdeen Asset Management in Singapore. Aberdeen has $3.3 billion in fixed income assets in Asia.

The returns have made it worthwhile for committed investors. Asian stocks markets are up more than 9 percent this year, while currencies such as the Taiwan dollar, won and Indonesian rupiah are up between 5 to 6 percent against the dollar.

Asia's investment grade dollar bonds, an investor favorite, are also returning near double-digit returns, with 5-year yields

down nearly 100 basis points from around 3.4 percent at the end of 2015.


Paresh Upadhyaya, the Boston-based director of currency strategy at Pioneer Investments, said the fund pared positions in the Brazilian real and Argentine peso, and remained long the rupee and rupiah which are more long-term and strategic positions.

"Given the divergence in rate expectations between the Fed and the market, we decided to pare back some of our risky positions and book some profits," Upadhyaya said.

Aberdeen's Akintewe has reduced exposure to Hong Kong dollar-based assets, given their deep ties with US dollar markets.

He sees good opportunity in peripheral bond markets such as Sri Lanka's where the yields compensate for the risk and there is enough return to offset any depreciation in the currency. "We can hold that as a long term structural trade and it's idiosyncratic because it's not really based on what the Fed does."

At UBS Asset Management, where there's $3 billion of fixed income assets being managed in Asia, the head of fixed income Ashley Perrott is happy to be long on Chinese yuan bonds and Korean bonds, while cutting some positions in India and Indonesia temporarily.

"The rates story in this region is still positive. If the Fed gets more aggressive then that might have an impact on people's perception of the dollar and then currencies can weaken and bonds could suffer in the shorter term," said Perrott.

"You just have to take some chips off the table from time to time when markets get a little bit extreme."