Market Outlook

Asian Bond Market Review & Outlook

By Desmond Fu, Trader/ Portfolio Analyst 
April 2020

Our base case remains for continued monetary accommodation and proactive fiscal response where necessary in the year ahead.

The global headline Manufacturing Purchasing Managers’ Index (PMI) came in at 48.2 in March, compared to 45.8 in February, due to a sharp rebound in China’s manufacturing PMI in the month. Excluding China, the global manufacturing PMI fell to 46.7 versus 49.7 in February. Unemployment claims are at historic highs yet unseen, with empty streets and complete stalling of entire supply and demand chains everywhere in the world. The viral spread continues unabated across the world and it is increasingly clear that unless there is a vaccine or effective treatment in place, this disruption to daily lives and demand will persist. The world economy faces its worst downturn since the Great Depression, the International Monetary Fund (IMF) predicted. Global gross domestic products (GDP) will shrink 3% this year, according to the IMF forecast, dwarfing 2009’s 0.1% decrease during the global financial crisis (GFC). The US economy is seen contracting 5.9% this year, and “risks of a worse outcome predominate” everywhere given the pandemic’s disruption.

Using the example of first-wave economies such as China, Korea, Japan and Singapore, it is evident that even after the epidemic curve is flattened, fairly strict social control measures must stay in place to prevent a spike. The path back to normalcy, one in which the virus no longer poses a threat to governance, social stability and medical institutions will require either an extended period of isolation or an effective vaccine rollout that provides sufficient immunity. There is no easy, quick return to normalcy, as governments juggle between re-opening with attendant risks of a resurgence of infections and the financial consequences of prolonged cash strains on business and low-income individuals. With estimated dates of containment and stabilization of healthcare system resources expected in late June, the earliest innings of any recovery in economic activity will be in third quarter of 2020.

The recovery will vary by sector, with infrastructure, domestic upstream manufacturing leading the way while exports and service sectors will be looking at a very slow, protracted recovery. Any re-opening will be cautious with close monitoring, physical distancing remaining in place as well as continued restrictions on large gatherings or social functions. The reality is nobody is safe until everyone is safe. Consumer confidence and even a sense of security and safety will take a long time to recover when government lockdowns lift. The re-opening of borders will be the last in line because of the constant risks of another wave of imported infections. 

Even when the pandemic abates, the longer-term impact on consumer and even business confidence will persist. This will manifest in a rise in savings, a precautionary motive to save, extending the global savings glut, which means extended weakness in consumption, muting private demand. Governments will likely offset some of that weakness via fiscal means to positively boost demand in the near term. Even if upstream industrial manufacturing gets back online, downstream retail and service sectors remain subdued except for essential food supply and services. Unlike typical recessions in history which were mostly industrial or manufacturing oriented, this will be a service sector induced recession. Leisure and entertainment sectors oriented towards both domestic and tourism are unlikely to recover in the near term. 

The revenue shock to small businesses, self-employed, gig-economy workers will continue to persist as consumption patterns shift. This is especially exacerbated in economies with large informal sectors or in the case of China, migrant workers who return to cities only to lose their jobs after losing months of wages during the lockdown. 

An interconnected global economy means that for export-oriented sectors, external demand is crucial, as evident in China, there have been significant layoffs due to the collapse in export orders. It’s no longer just a supply chain problem, it’s going to be a demand chain problem. The eventual pickup in consumer confidence and demand will be key, that is dependent on the extent and duration of welfare support, especially in developed economies. The greater risk is the scale of job losses, sustained impairment of household incomes and business confidence, a shock to demand that extends secular stagnation.

The IMF expects growth in Asia to stall to zero percent in 2020, the worst growth performance in almost 60 years, including during the GFC (4.7 percent) and the Asian Financial Crisis (1.3 percent). That said, Asia still looks to fare better than other regions in terms of activity. For emerging economies in South Asia, which are second-wave COVID-19 countries, the near-term outlook is weak, especially for Malaysia, Thailand, the Philippines and Indonesia as the risks of an extended lockdown are material to both households due to the effect of income as well as corporates that are dependent on the discretionary consumption amongst other factors. The actual impact of a sustained epidemic on tourism, consumption and industrial output due to supply chain disruptions will weigh significantly on growth and demand extreme support from all levers available to governments. These are also countries that are most at risk from an uncontrolled outbreak due to weak medical infrastructure. 

The silver lining there is a relatively young population. The heterogeneity of Asian economies will continue to reflect the divergence in growth between economies more closely linked to China’s consumption and the Asian tech supply chain as well as those that are more endogenously driven. What is consistent is that Asian economies that have the policy space, the political stability and the populace support to deal with the vicissitudes of an uncertain economic environment will do well. 

Our base case remains for continued monetary accommodation and proactive fiscal response where necessary in the year ahead. We continue to be positioned for broader curve flattening and selective in favor of markets that are domestically oriented, politically stable and well positioned for slow, steady growth in such an environment.


Source: Legg Mason and Western Asset. This document is based on an update from Western Asset Management, a subsidiary of Legg Mason. The views expressed are opinions of Western Asset Management as of the date of this material and are subject to change based on market and other conditions without notice and may differ from other investment professionals or from those of the firm as a whole. This document is for information only and does not constitute a financial promotion or other financial, professional or investment advice in any way. All data, opinions, estimates and other information are provided as of the date of this document and may be subject to change without notice. Where past performance is quoted, such figures are not indicative of future performance.

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