US dollar-denominated Asian credit—once seen as a volatile last resort— may be an unexpected beneficiary of Donald Trump’s policies. Also, last week’s Bank of England rate cut will do little to alleviate the UK’s housing market woes.
US dollar-denominated Asian credit—once seen as a volatile last resort— may be an unexpected beneficiary of Donald Trump’s policies. Also, last week’s Bank of England rate cut will do little to alleviate the UK’s housing market woes.
November 12 2024
As markets digest the return of Donald Trump to the White House, the focus is shifting to the impact on Asia, and particularly China. Early assessments may suggest challenges for the region, with Asian central banks (who are heavily influenced by Federal Reserve policy) possibly adopting a more cautious monetary policy stance. While the Fed has stuck to its interest-rate plan for now, cutting the key rate by 25 basis points last week, the future cutting path may be much shallower, given the anticipated inflationary policies in the US.
One unexpected beneficiary may be US dollar-denominated Asian credit, as Trump’s policies support favourable demand-supply dynamics for the asset class, amid a backdrop of increased resilience in the region’s economies. This has helped reshape the narrative of this asset class. Historically, Asian credit was a last resort for global investors, who often considered it a volatility play compared to more established markets like the United States, Europe, and emerging markets.
Here are the three initial key drivers of the potential revival:
1. Stronger dollar and higher for longer
As more than 70% of the investor base in USD Asia credit is from the region, a strong US dollar encourages local and international allocators to increase their exposure. This may be counterbalanced by Asian issuers likely turning to local markets for refinancing, thus limiting new US dollar-denominated bond supply and creating a favourable supply-demand dynamic.
Sovereigns in the region have less flexibility to cut interest rates, as they focus on defending their currencies. However, China is now shifting its focus towards fiscal policy rather than monetary measures to stabilise its economy. Furthermore, the extent of the reforms Asian countries have implemented since the 2013 taper tantrum—when Fed plans to reduce its quantitative easing program triggered a market panic—is often underestimated. India's and Indonesia's resilience during the recent US interest-rate hiking cycle underscores this point. Also, during Trump's previous presidency from 2016-2020, the US dollar moved in line with typical interest rate cycles, illustrating the region's ability to adapt to these economic conditions.
2. Trade tariffs – the first cut (Trump version one) was the deepest
A lot of the bad news around Trump’s rhetoric on imposing 60% tariffs on Chinese goods and up to 20% on Asia ex-China has been more than priced in.
China felt the brunt of tariffs during the first Trump presidency, when global trade was at its peak. In response to the more hostile trade environment, it has, since 2018, strategically diversified its exports away from the US and other developed markets, increasing its share in emerging markets. As a result, China has maintained its position as the largest global exporter while reducing its reliance on developed markets. We believe that the market may be overestimating the negative impact of trade tensions on China, while underestimating the adverse effects on other regions, such as Europe and Mexico.
That said, even though the trade deficit between the United States and China has decreased since Trump's previous term, deficits with other Asian exporting countries have grown significantly. This shift may attract increased attention and scrutiny. Considering Trump's goal of reducing trade deficits, there is a possibility that this could prompt US tariffs on other Asian economies. We still believe the rest of Asia is likely to be able to weather a 10% tariff hike as some of this will be offset by better terms of trade.
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3. Trump policies to prompt a rotation to domestically driven credits
While China's policy measures announced at the National People’s Congress (NPC) may not fully satisfy investors hoping for a reflation trade, they are supportive from a credit perspective. These measures help mitigate tail-risk, reduce defaults, and create a credit-friendly environment. China has announced a ten trillion yuan (US $1.39 trillion) multi-year programme to refinance local debt, comprising six trillion yuan of new debt and four trillion yuan of refinancing. This initiative effectively transforms hidden debt into official debt, extends the debt maturity profile, and lowers the interest burden.
Trump cards?
Donald Trump's return to the presidency brings potential challenges for Asia through trade policies, yet it also presents unexpected opportunities. US dollar-denominated Asian credit could benefit from more favourable technical factors, while regional economic resilience offers further reasons for optimism. The recent stabilisation measures in China will likely benefit other countries in the region and encourage policymakers to also start addressing the challenges facing their economies more pro-actively.
UK Government's Housing Plans Face Reality Check Even After BoE Rate Cut
Despite the Bank of England's (BoE’s) 25-basis-point interest-rate cut last week to 4.75%, there’s little light at the end of the tunnel for aspiring UK homeowners and renters. The average UK house price hit a record high in October, according to figures from the country’s largest mortgage lender, Halifax. The bank also warned that mortgage costs could remain "higher for longer" following the Budget two weeks ago.
The government's ambitious target of delivering 1.5 million homes in five years appears unrealistic to us, given last year's housing delivery figures and record-low planning permission approvals. However, the policies and capital spending plans designed to achieve this target could significantly impact the UK housing market in the medium- to long-term.
The government's commitment to expanding the housing market aims to stimulate growth across all tenures, including social rent, affordable rent, shared ownership, market rent, and market sale. These changes present potential opportunities for investors in the affordable housing sector.
Support for more affordable homes
The Shared Ownership and Affordable Homes Programme, initially funded at £2.1 billion (US$ 2.7 billion) for 2021-2026, ran out of funds by September 2024, due to high demand. The government has added £500 million, reinforcing its commitment to affordable housing. While this boosts ongoing projects, it won't significantly expand the housing stock in the short term. Plans to renew the programme in 2026 are in progress, presenting future investment opportunities.
Rent certainty for affordable housing
Rents in the affordable housing sector can now be indexed at the Consumer Price Index plus 1%. offering investors stability and income visibility. However, the five-year framework may not provide enough certainty for longer-term projects. A more stable rent regime is expected by Spring 2025, potentially enhancing long-term investment security.
Planning reform
Planning reform is key to the government's growth agenda, aiming to expedite processes and require councils to have a local plan. Central government can intervene if local targets are unmet. The inclusion of build-to-rent as a tenure type highlights its role in accelerating delivery and regeneration. Initiatives such as hiring 300 junior planning officers and a Homes England programme to fast-track stalled sites could improve planning efficiency and timelines.
Despite these efforts, systemic challenges like a shortage of small medium enterprise (SME) builders, an ageing workforce, labour shortages, and infrastructure inadequacies persist. These issues impede the goal of 300,000 homes per year and maintain the demand-supply imbalance in the affordable housing market. Investors in the sector can expect to see strong demand, high occupancy rates, and robust rental growth, underscoring the sector's investment appeal amidst ongoing challenges.
All data Bloomberg unless otherwise stated.
With contributions from Christina Bastin, Portfolio Manager, Asia Credit team; Ricky Mui, Analyst, Asia Credit team; Chris Litchfield, Associate, Investment Services; and Shamez Alibhai, Managing Director, Head of Community Housing, Man Group.
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