Following the significant repricing of markets that took place in 2018, we are now seeing the elements in place for strong performance across Asian interest rates, currencies and credit in 2019.
Since the US Federal Reserve raised rates four times in 2018 and stayed the course on balance sheet reduction, we expect no further Fed rate hikes this year.
This would give Asia's policymakers an opportunity to also slow their pace of rate hikes, given that inflation remains low across the region.
Our outlook for Asian currencies is also bright. With US growth still positive but decelerating and the Fed appearing to be on hold, we expect Asia's currencies to outperform versus the dollar.
The significant drop in oil prices late in 2018 also helped shore up oil-importing countries across Asia, providing a boost to foreign exchange reserves, current accounts and fiscal balances.
Finally, Asia high-yield spreads offer attractive values for the long-term investor. With 12-month trailing default rates at 1.55% and spreads hovering about 6% at the end of 2018, the market has priced in substantially higher expected future defaults than the current run rate.
We believe the major risks to the region - including a further slowdown in global growth, any escalation in trade shocks or further outflows stemming from policy normalisation in the US - are priced in at these levels.
As such, the relatively attractive yields in Asia offer a strong base for positive returns.
Rotation in global leadership
Looking at the global macro picture, we see the potential for the reacceleration of growth in China, in contrast to persistent economic weakness in Europe and decelerating growth in the US.
The weak data from Europe is coming from both the strong countries such as Germany, as well as the weaker economies such as Italy. This is worrisome, especially in light of the political uncertainty.
On the US front, the American economy will likely decelerate as fiscal stimulus fades. Finally, we have seen steady doses of fiscal stimulus out of China, which should provide a soft landing for the economy.
Since November 2018, we have seen consistent signs that China is moving into a more fiscally proactive policy stance. We see infrastructure spending has rebounded, for example, and more projects being approved. Local government bond issuance has also increased.
With China becoming increasingly fiscally proactive and stimulative efforts from the US lacking, we expect there would be a reversion of the 'decoupling' that we saw last year.
The implication for us is that we continue to hold a constructive view on Asian economies and Asian currencies this year.