In 2017, Asia benefitted from a synchronised global growth recovery and a "Goldilocks" environment, where above-trend growth was accompanied by benign inflation.
Global stock market volatility fell to historical lows, and measures of consumer and business confidence in the US and other major developed markets improved markedly over the year.
Asian bond markets have fared well in this environment with the Asian local currency and USD bonds rising by 11% and 6% respectively in USD terms.
Performance for equity and credit markets thus far in 2018 is certainly a contrast from the positive and well-behaved price movements in 2017.
With the US Federal Reserve likely to stay the course for three-to-four rate hikes this year and Sino-US trade tensions rearing their head, we expect more rather than less volatility to prevail in 2018.
Despite these headwinds, however, we view the underlying fundamentals as still pretty supportive of steady global growth.
Private sector investments have risen and manufacturing activities remain robust, albeit with recent signs of moderation.
Global financial conditions continue to lean on the easy side, while the Fed's tightening has been well communicated, reducing risks that rate hikes would cause by sudden market adjustments.
Although the break-out of a trade war remains a risk that could derail global growth, we assign a low probability to this scenario for now as the involved parties continued to demonstrate a willingness to working towards a solution. Both China and the US do realise the hard consequences of a "bad ending".
Still, the sensitive issue of intellectual property protection in the trade negotiations could prove difficult.
The positive global growth environment and the underlying strengths of Asian economies should continue to underpin investor confidence in Asian bond and currency markets.
Indeed, among all the emerging market regions, Asia stands out as a region having the strongest growth prospects and favourable fundamentals.
Economic and political reform
The economic and political reform momentum continues in the large economies of China, India and Indonesia. While the path to improvement is not always smooth, the reform agenda pushes these countries forward in the right direction.
In India and Indonesia, much progress has been made on tax reforms, infrastructure investment and liberalisation of foreign direct investments.
Central banks have also built a more robust "war chest" of reserves and adopted inflation-targeting frameworks, which help anchor inflation expectations.
In China, policy focus has shifted to lowering the debt risk while improving the country's quality of growth. Efforts have already been made in supply-side reforms, such as cutting overcapacity and corporate deleveraging.
The Chinese authorities, including President Xi, have time and again reiterated China's commitment to promote trade and investment liberalisation.
Apart from these developments, foreign investors' participation in onshore bond markets is expected to provide another channel of investment flows into Asia.
Notably, since 2016, China has gradually widened access to its $9trn bond market through the lifting of foreign access restrictions to its interbank bond market and establishing the "bond connect" platform between Hong Kong and China.
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