US dollar’s structural weakness could benefit Asian emerging markets

30/10/2020
US dollar’s structural weakness could benefit Asian emerging markets

Summary

A bearish longer-term outlook for the US dollar could bolster Asian economies as they continue their tentative recovery from the Covid-19 pandemic.

Key takeaways

  • As Asian emerging markets seek to bounce back from the Covid-19 pandemic, they could receive support from an unexpected area: a structurally weaker US dollar
  • A weaker US dollar would help reduce the foreign exchange debt stock and service burden for those South and South-East Asian economies which have increased USD debt over the past decade
  • A more attractive exchange rate against the US dollar could also help emerging markets attract capital inflows, which have been affected by the drop in global trade

While the halo effect of China’s ongoing growth story is a major influence on other Asian economies, US fiscal and monetary policy also has a significant effect on these countries. Given the bearish outlook for US interest rates, Asian emerging markets (EM Asia) could benefit from a weaker US dollar.

While the US dollar continues to offer a potential safe haven for investors, and has benefited accordingly, there are concerns about the fiscal health of the US. The US has spent heavily on recovering its economy from the Covid-19 pandemic, with total fiscal stimulus that could end up being 40% higher than similar interventions elsewhere in the world, assuming a fourth stimulus package is eventually passed.

This is starting to point towards a more depressed outlook for the US currency – which could be positive for EM Asia.

A weakened US dollar could boost Asia’s emerging markets

There are several reasons why ultra-low US interest rates and a structurally weak US dollar are positive for EM Asia:

  • The resulting positive real yield (yield after inflation) offered in EM Asia could prove attractive to international bond inflows. Although Asian central banks have also cut rates to support their domestic economies in the wake of the Covid-19 pandemic, the region is still able to offer positive real yield to investors.
  • Stronger EM Asia currencies relative to the US dollar could help improve Asia’s balance of payment position, attracting capital inflows and reducing the foreign-debt burden. This is particularly beneficial to economies like Indonesia, India and the Philippines, which need foreign inflows to finance their current account deficits (the gap between the value of imports and exports) and which have higher foreign-currency-denominated debt. EM Asia economies generally have increased their US dollar debt over the past decade, particularly in the private sector, so a weaker US dollar would help reduce the foreign currency debt stock, and service burden.
  • A weaker US dollar would reflect the relative outperformance of emerging markets (EMs) compared with developed markets; this outperformance could also be the result of stronger global trade. We anticipate that the weakening of the US dollar is likely to coincide with the world economy gradually stepping out from the impact of Covid-19, and global trade recovering from its current state.

The dollar is far from the only factor that will determine EM Asia’s economic success. For example, each economy’s relative success in containing the pandemic will be critical in driving Asian economies’ macro performance.

To this end, we maintain our view that North-East Asian economies like China, South Korea and Taiwan – which are included in the MSCI Emerging Markets Index and so classed as EMs – are leading the region. They have managed to get Covid-19 largely under control while their domestic economies have been able to recover and resume normal operation without excessive stimulus support – either fiscal or monetary.

Investment implications

EM equities generally tend to outperform those in developed markets during periods of US dollar weakness, and EM Asia is no exception. The DXY (US Dollar Index index tracks the dollar’s value relative to the currencies of the US’s most significant trading partners. Historically it has been negatively correlated with the relative equity performance of EMs versus developed markets. Although this negative correlation has somewhat weakened in recent years, it continues to support our view that the relative strength of EM currencies versus the US dollar reflects both the global business cycle and the growth fundamentals of the EM world.

We would also expect EM credit spreads (the difference in yield between EM securities and US bonds) to tighten during periods of US dollar weakness. Historic data suggest that EM credit spreads are inversely correlated with EM currency strengths and commodity prices. As such we maintain our recommendation that investors increase exposure towards good-quality corporate credit in Asia.

 

> download

US elections: race is far tighter than expected – again

04/11/2020
US elections: race is far tighter than expected – again

Summary

While the results are not yet final, the 2020 US presidential race is much closer than the polls and betting markets predicted. Investors should expect some flight-to-safety response in areas like US Treasury bonds and the dollar, and technology may perform well if President Trump secures victory again.

Key takeaways

  • While there may still be a path to victory for Democratic candidate Joe Biden, this would come through key swing states that may take days to count votes, like Pennsylvania, Michigan and Wisconsin
  • Markets may continue to respond favourably to a potential second term for Mr Trump, focusing on his more business-friendly policies and lower tax regime overall; sectors like technology and financials may especially benefit
  • Investors have reasons to be optimistic heading into 2021: once a result is known, the backdrop of rising economic growth, low rates, and stimulus should be good for stocks and other risk assets

Allianz Global Investors

You are leaving this website and being re-directed to the below website. This does not imply any approval or endorsement of the information by Allianz Global Investors Asia Pacific Limited contained in the redirected website nor does Allianz Global Investors Asia Pacific Limited accept any responsibility or liability in connection with this hyperlink and the information contained herein. Please keep in mind that the redirected website may contain funds and strategies not authorized for offering to the public in your jurisdiction. Besides, please also take note on the redirected website’s terms and conditions, privacy and security policies, or other legal information. By clicking “Continue”, you confirm you acknowledge the details mentioned above and would like to continue accessing the redirected website. Please click “Stay here” if you have any concerns.

Welcome to Allianz Global Investors

Select your language
  • 中文(繁體)
  • English
Select your role
  • Individual Investor
  • Intermediaries
  • Other Investors
  • Pension Investors
  • Allianz Global Investors Fund (“AGIF”)

    • Allianz Global Investors Fund (“AGIF”) as an umbrella fund under the UCITS regulations has within it different sub-funds investing in fixed income securities, equities, and derivative instruments, each with a different investment objective and/or risk profile.

    • All sub-funds (“Sub-Funds”) may invest in financial derivative instruments (“FDI”) which may expose to higher leverage, counterparty, liquidity, valuation, volatility, market and over the counter transaction risks. A Sub-Fund’s net derivative exposure may be up to 50% of its NAV. 

    • Some Sub-Funds as part of their investments may invest in any one or a combination of the instruments such as fixed income securities, emerging market securities, and/or mortgage-backed securities, asset-backed securities, property-backed securities (especially REITs) and/or structured products and/or FDI, exposing to various potential risks (including leverage, counterparty, liquidity, valuation, volatility, market, fluctuations in the value of and the rental income received in respect of the underlying property, and over the counter transaction risks). 

    • Some Sub-Funds may invest in single countries or industry sectors (in particular small/mid cap companies) which may reduce risk diversification. Some Sub-Funds are exposed to significant risks which include investment/general market, country and region, emerging market (such as Mainland China), creditworthiness/credit rating/downgrading, default, asset allocation, interest rate, volatility and liquidity, counterparty, sovereign debt, valuation, credit rating agency, company-specific, currency  (in particular RMB), RMB debt securities and Mainland China tax risks. 

    • Some Sub-Funds may invest in convertible bonds, high-yield, non-investment grade investments and unrated securities that may subject to higher risks (include volatility, loss of principal and interest, creditworthiness and downgrading, default, interest rate, general market and liquidity risks) and therefore may adversely impact the net asset value of the Sub-Funds. Convertibles will be exposed prepayment risk, equity movement and greater volatility than straight bond investments.

    • Some Sub-Funds may invest a significant portion of the assets in interest-bearing securities issued or guaranteed by a non-investment grade sovereign issuer (e.g. Philippines) and is subject to higher risks of liquidity, credit, concentration and default of the sovereign issuer as well as greater volatility and higher risk profile that may result in significant losses to the investors. 

    • Some Sub-Funds may invest in European countries. The economic and financial difficulties in Europe may get worse and adversely affect the Sub-Funds (such as increased volatility, liquidity and currency risks associated with investments in Europe).

    • Some Sub-Funds may invest in the China A-Shares market, China B-Shares market and/or debt securities directly  via the Stock Connect or the China Interbank Bond Market or Bond Connect and or other foreign access regimes and/or other permitted means and/or indirectly through all eligible instruments the qualified foreign institutional investor program regime and thus is subject to the associated risks (including quota limitations, change in rule and regulations, repatriation of the Fund’s monies, trade restrictions, clearing and settlement, China market volatility and uncertainty, China market volatility and uncertainty, potential clearing and/or settlement difficulties and, change in economic, social and political policy in the PRC and taxation Mainland China tax risks).  Investing in RMB share classes is also exposed to RMB currency risks and adverse impact on the share classes due to currency depreciation.

    • Some Sub-Funds may adopt the following strategies, Sustainable and Responsible Investment Strategy, SDG-Aligned Strategy, Sustainability Key Performance Indicator Strategy (Relative), Green Bond Strategy, Multi Asset Sustainable Strategy, Sustainability Key Performance Indicator Strategy (Absolute Threshold), Environment, Social and Governance (“ESG”) Score Strategy, and Sustainability Key Performance Indicator Strategy (Absolute). The Sub-Funds may be exposed to sustainable investment risks relating to the strategies (such as foregoing opportunities to buy certain securities when it might otherwise be advantageous to do so, selling securities when it might be disadvantageous to do so, and/or relying on information and data from third party ESG research data providers and internal analyses which may be subjective, incomplete, inaccurate or unavailable and/or reducing risk diversifications compared to broadly based funds) which may result in the Sub-Fund being more volatile and have adverse impact on the performance of the Sub-Fund and consequently adversely affect an investor’s investment in the Sub-Fund. Also, some Sub-Funds may be particularly focusing on the GHG efficiency of the investee companies rather than their financial performance which may have an adverse impact on the Fund’s performance.

    • Some Sub-Funds may invest in share class with fixed distribution percentage (Class AMf). Investors should note that fixed distribution percentage is not guaranteed. The share class is not an alternative to fixed interest paying investment. The percentage of distributions paid by these share classes is unrelated to expected or past income or returns of these share classes or the Sub-Funds. Distribution will continue even the Sub-Fund has negative returns and may adversely impact the net asset value of the Sub-Fund.  Positive distribution yield does not imply positive return.

    • Investment involves risks that could result in loss of part or entire amount of investors’ investment.

    • In making investment decisions, investors should not rely solely on this [website/material].

    Note: Dividend payments may, at the sole discretion of the Investment Manager, be made out of the Sub-Fund’s capital or effectively out of the Sub-Fund’s capital which represents a return or withdrawal of part of the amount investors originally invested and/or capital gains attributable to the original investment. This may result in an immediate decrease in the NAV per share and the capital of the Sub-Fund available for investment in the future and capital growth may be reduced, in particular for hedged share classes for which the distribution amount and NAV of any hedged share classes (HSC) may be adversely affected by differences in the interests rates of the reference currency of the HSC and the base currency of the respective Sub-Fund. Dividend payments are applicable for Class A/AM/AMg/AMi/AMgi/AQ Dis (Annually/Monthly/Quarterly distribution) and for reference only but not guaranteed.  Positive distribution yield does not imply positive return. For details, please refer to the Sub-Fund’s distribution policy disclosed in the offering documents.


    Allianz Global Investors Asia Fund

    • Allianz Global Investors Asia Fund (the “Trust”) is an umbrella unit trust constituted under the laws of Hong Kong pursuant to the Trust Deed. Allianz Thematic Income and Allianz Selection Income and Growth and Allianz Yield Plus Fund are the sub-funds of the Trust (each a “Sub-Fund”) investing in fixed income securities, equities and derivative instrument, each with a different investment objective and/or risk profile.

    • Some Sub-Funds are exposed to significant risks which include investment/general market, company-specific, emerging market, creditworthiness/credit rating/downgrading, default, volatility and liquidity, valuation, sovereign debt, thematic concentration, thematic-based investment strategy, counterparty, interest rate changes, country and region, asset allocation risks and currency (such as exchange controls, in particular RMB), and the adverse impact on RMB share classes due to currency depreciation.  

    • Some Sub-Funds may invest in other underlying collective schemes and exchange traded funds. Investing in exchange traded funds may expose to additional risks such as passive investment, tracking error, underlying index, trading and termination. While investing in other underlying collective schemes (“CIS”) may subject to the risks associated to such CIS. 

    • Some Sub-Funds may invest in high-yield (non-investment grade and unrated) investments and/or convertible bonds which may subject to higher risks, such as volatility, creditworthiness, default, interest rate changes, general market and liquidity risks and therefore may  adversely impact the net asset value of the Fund. Convertibles may also expose to risks such as prepayment, equity movement, and greater volatility than straight bond investments.

    • All Sub-Funds may invest in financial derivative instruments (“FDI”) which may expose to higher leverage, counterparty, liquidity, valuation, volatility, market and over the counter transaction risks.  The use of derivatives may result in losses to the Sub-Funds which are greater than the amount originally invested. A Sub-Fund’s net derivative exposure may be up to 50% of its NAV.

    • These investments may involve risks that could result in loss of part or entire amount of investors’ investment.

    • In making investment decisions, investors should not rely solely on this website.

    Note: Dividend payments may, at the sole discretion of the Investment Manager, be made out of the Sub-Fund’s income and/or capital which in the latter case represents a return or withdrawal of part of the amount investors originally invested and/or capital gains attributable to the original investment. This may result in an immediate decrease in the NAV per distribution unit and the capital of the Sub-Fund available for investment in the future and capital growth may be reduced, in particular for hedged share classes for which the distribution amount and NAV of any hedged share classes (HSC) may be adversely affected by differences in the interests rates of the reference currency of the HSC and the base currency of the Sub-Fund. Dividend payments are applicable for Class A/AM/AMg/AMi/AMgi Dis (Annually/Monthly distribution) and for reference only but not guaranteed.  Positive distribution yield does not imply positive return. For details, please refer to the Sub-Fund’s distribution policy disclosed in the offering documents.

     

Please indicate you have read and understood the Important Notice.