Fixed-income investors in the Asia-Pacific region are most concerned about reduced monetary stimulus by global central banks and its effect on credit conditions, according to a survey by ratings agency Fitch.
As many as 87% of respondents believe a reduction of quantitative easing is the main risk, although the US Federal Reserve (Fed) said it would not yet start tapering asset purchases.
“There was only a modest relaxation of participant views after this date,” said Monica Insoll, managing director for credit market research at Fitch. “Although financial assets in the region have recovered since mid-September, there is plenty of portfolio capital still in emerging Asia which is exposed to the eventual taper commencement.”
However, the likelihood of a tapering taking place at its next policy meeting this month is slim as a result of the US’s ongoing budget and debt ceiling impasse. With the US 16 days into a government shutdown, and just 24 hours away from the point at which the Treasury no longer has authority to borrow, there were signs market participants were running out of faith.
“The general consensus is that tapering discussions are now not likely to kick in until December,” said a debt syndicate banker. “Any type of resolution or certainty given to the market is going to be treated as a positive.”
In addition to tapering concerns, 57% of investors are worried about property bubbles but, on balance, they are relatively relaxed regarding other potential threats, with the majority rating all other risks as low, highlights Fitch. Concerns about a prolonged recession in the US and Europe, and escalating regional geopolitical risk – involving China, Japan and the Korean peninsula – ranked lowest.
A hard-landing in China and failure of Abenomics were slightly more of a problem, adds the rating agency.
Emerging Asia market pressures
Seventy-nine percent of the participants surveyed believe underlying credit conditions will deteriorate for emerging market sovereigns, with 68% expecting the same for corporates in the region over the next 12 months, notes Fitch. A similar proportion of investors expect spreads in segment to widen and corporate issuance to decline over a similar period.
India and Indonesia were targeted as have the most pessimistic outlook, with 80% and 76% of investors respectively expecting an economic slowdown in these two emerging markets.
From the beginning of May, after the US Fed said it would begin reducing its stimulus to the economy, foreign investors sold off assets in emerging markets from India to Indonesia. Both countries’ high current account deficit has made them especially vulnerable to a surge in capital outflows,
However, Fitch believes the key credit risks are likely to be limited to specific issuers and that widespread sovereign, banking or corporate credit distress remains unlikely. At the sovereign level, the rating agency notes that credible, coherent economic policy management will remain the most effective shield for credit profiles.
“The region is fundamentally more resilient than in earlier decades to a drain of global liquidity, and we do not see a repeat of the Asian financial crisis of 1997,” said Insoll.
Fitch has lowered GDP growth projections across emerging market Asia to 5.7% for this year and 5.8% for the next – the slowest rate since 1998. However, the slowdown is largely credit neutral.
Fitch conducted its inaugural ‘Asia Pacific Senior Fixed-Income Investor Survey’ between August 20 and September 20. It represents the views of 72 senior investors in the region, including asset management companies, sovereign wealth funds, insurance companies, pension funds, wealth managers, banks and hedge funds.
