Towards the second weekend of September, a leak was carried in Japan’s most reputable business newspaper, Nikkei, that Lawrence Summers would be appointed as the next US Federal Reserve chairman in the following week. In many ways, it was not a total surprise to the market, but the market was not too impressed with a more hawkish Fed chairman. However, two days later, the news was no longer relevant, as Summers himself announced his withdrawal from nominations. As a result, Janet Yellen, who is the current Fed vice chairman, became the forerunner for the position after Bernanke’s departure. Global markets celebrated a more market-friendly candidate, but the good news didn’t just stop there. It was unanimously expected that the Fed would begin to taper its quantitative easing (QE) program after the September FOMC meeting. But at the meeting, Mr Bernanke decided to hold on. It was a complete surprise to market. It felt like a trailing baseball team scoring a home run in the last inning and winning the game. Both events sent a strong message to the market that there is no specific time line for the QE exit. As a result, Asian markets, having already started to price in QE tapering in September, reacted with a roar that saw the MSCI Asia ex-Japan index soar 5.4% in a single month. Like in all comebacks, the worst hit markets posted the strongest rebound. India and Thailand led the region, with their MSCI indices posting over 9% gains in September. Interest rate-sensitive developed markets like Hong Kong and Singapore also reclaimed more than 5% of their lost ground. Similar reactions were also observed in currency markets, with the Indian rupee making the strongest moves.
For the foreseeable future, Asia will remain hostage to the Fed’s policy direction, but there had been a pick-up in activity in the region, especially in China. After months of tighter liquidity, China’s economy finally showed more signs of life with its industrial production posting strong growth of 10.4% YoY in August. While it is true that economic growth is still very uneven, recent events seem to suggest that the new administration has finally defined its policy goal. Earlier in the year, it was suggested that lower economic growth can be tolerated to ensure better quality growth in the future. Now it looks like that the central government has reached a compromise and defined a GDP growth rate of 7.5% as the lowest tolerable level. Although the economy will still deleverage despite the clearer policy goal, at least the market no longer has to second guess policy direction. Policy makers seem to agree that conditions are not ripe for major reforms.
In India, we also saw good market reaction to the policy reversal in the US. However, it was not the only reason behind the strong move. The Reserve Bank of India installed a new governor, Dr Raghuram Rajan, in September. He used to work for the IMF as a chief economist. At his first rate decision meeting, he raised the benchmark rate by 25 bps. His priority is clearly to fight the stubbornly high inflation, which spiked up to 6.1% YoY in August. Both equity and currency markets reacted well to his firm and clear stance. While we were also impressed with him, we must not forget that the deleveraging is still unfolding in India.
Turning to convertible markets, it is encouraging to see renewed interest in the primary issuance of convertible bonds in the region. On a year-to-date basis, there has been a total of USD 8.1 bn of new issuance in Asia. The figure is already larger than the full-year figure of last year and it is on track to outdo the 2011 figure as well. During the month, the size of the convertible market also increased by USD 1 bn to reach USD 38.7 bn in Asia.
The risk-on sentiment also extended to credit markets in September. The JACI (JP Morgan Asia Credit Index) investment grade corporate spread and the non-investment grade corporate spread contracted by 5 bps and 15 bps, respectively.
In the portfolio, we started a new position in Capitaland 2023 at the expense of our positions in Capitaland 2016 and 2018. PB ISS 2016 was also introduced to the portfolio. We added to Advanced Semiconductor 2018, Hengan International 2018, Lotte Shopping 2018 and Pacific Basin 2018. We reduced exposure to Jaiprakash 2015, China Overseas 2014 and SK Tel 2016.
Fund management team
LO FUNDS – CONVERTIBLE BOND ASIA