Beyond Bulls & Bears

Fixed Income

Asia at the Forefront: The World’s Uneven Emergence from COVID-19

There is significant variation in how countries have handled the pandemic, managed fiscal and monetary policy, and supported their economies, according to Templeton Global Macro. While the euro area and the US contend with deepening fiscal deficits and excessive monetary accommodation, areas of Asia are in stronger fiscal shape, with greater growth potential, robust trade dynamics and current account surpluses.

Listen to our latest “Talking Markets Podcast” to hear more from Templeton Global CIO Michael Hasenstab.

Read more in-depth views in the team’s latest Global Macro Shifts publication: “Asia at the Forefront: The World’s Uneven Emergence from COVID-19.”

Key takeaways from the team:

  • Two significant events in the waning months of 2020 have significantly re-shaped the investment opportunities in 2020. The first is the development and distribution of highly effective vaccines against COVID-19, which is a massive game-changer on both the health and economic fronts. The second is a return to more orthodox diplomacy in the United States, which lowers the risks for a geopolitical shock.
  • Asia is at the forefront of the global economic recovery, in our assessment, as many countries in the region benefit from better fiscal management, favourable trade dynamics, current account surpluses and stronger growth potential. Asia also broadly benefits from being within China’s currency orbit and its regional economic sphere, given China’s massive growth potential. We expect fundamental factors to support currency valuations across much of Asia in the upcoming year.
  • Most Asian countries have also handled the pandemic better than much of the world, not only putting the region in a stronger position to recover, but also providing protection against potential setbacks should the pandemic relapse. Many countries in the region have higher interest rates than much of the developed world and significantly lower debt levels, creating attractive investment opportunities.
  • We expect the rise of China to have a significant impact on the global economy, as China increasingly pursues outward expansion of its global influence. The “One Belt, One Road” initiative is a major factor in the country’s global ascendance, as are several factors that are driving the Chinese yuan towards reserve currency status. International use of the yuan has accelerated, aided by efforts to digitalise the currency, exponentially increasing access to it. Regional trade and asset ownership is increasingly denominated in the yuan.
  • Fundamentals are more challenging in much of the developed world, notably in the United States where debt levels are at their highest levels since the end of World War II and headed towards 110% of gross domestic product in 2021. Fiscal deficits continue to deepen to record levels as trillions of US dollars in emergency spending are deployed.
  • US monetary policy also remains exceptionally accommodative, with the Federal Reserve (Fed) indicating it intends to allow inflation to run above its 2% target in upcoming years to make up for several years of below-target inflation, and to avoid the risks of removing stimulus too early. A strong majority of Fed officials expect rates to remain near the zero-bound through 2023. The Fed’s balance sheet also continues to expand by more than US$120 billion a month.
  • We expect weakness in the US dollar and the euro on excessive fiscal and monetary policies against currencies in countries that are in stronger fundamental shape, with healthier fiscal balances, manageable levels of debt, current account surpluses, stronger growth potential and prudent monetary policy. Specific currencies in Asia and Scandinavia appear particularly attractive.
  • Sharply rising US Treasury yields in recent weeks appear driven by concerns that loose monetary policy, massive fiscal stimulus and surging growth will drive inflation higher. While we share some of those concerns, we also see factors that have historically kept inflation in check, notably a negative output gap on huge excess capacities, and high unemployment that mitigates wage pressures. We expect a near-term spike in inflation, but the potential for it to become persistent and feed into higher inflation expectations remains in question, in our assessment.
  • An end to the COVID-19 pandemic should open up investment opportunities in a number of emerging markets, in our view. A tremendous amount of value was locked up last year due to ongoing shocks and persistent uncertainty. Conditions were unstable at the beta level: broad-based risk dynamics, access to funding, capital account access, global commodity prices, global growth, and open trade, were all profoundly disrupted.
  • With baseline beta factors normalising, the idiosyncratic alpha potential of individual countries is re-emerging. We are actively evaluating macro fundamentals and environmental, social and governance (ESG) factors to identify specific countries that are improving in ways that offer medium- to longer-term value. We currently see significant local-currency opportunities across Asia, as well as select markets in other regional surplus economies.

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All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

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