Surprise policy tightening moves announced by central banks in Singapore and the Philippines signal Asia is now fully awake to the threat of accelerating inflation and is playing catch up with its global peers.
Analysts in the region recommend a number of strategies that investors can take in response to the increasingly hawkish environment, including favouring the Singapore dollar, dividend stocks and the Thai baht. Conversely, they are generally bearish toward assets in Indonesia and the Philippines.
Singapore’s central bank allowed the local currency to appreciate by re-centering the midpoint of the policy band up to its prevailing level, while Philippine policy makers followed shortly afterward with its own surprise three-quarter-point move. The announcements came after United States monthly inflation data once more exceeded forecasts on Wednesday.
Here is a selection of comments from regional strategists:
- Smartsun Capital Pte (Sumeet Rohra, fund manager in Singapore)
Keeping in view that inflation continues to be high, and the Fed is hiking rates, it would be prudent to stick to value stocks with dividend yield.
Stock markets may be closer to finding a floor between 7% to 10% from current levels as oil and other key commodity prices fall, the possibility of some type of truce between Russia and the Ukraine and the European Union intervening to ensure gas supply from Russia.
"All this augurs well for inflation cooling off and global rally can start toward the end of the year and risk assets will be back on."
- MUFG Bank Ltd (Jeff Ng, FX strategist in Singapore)
Asian central banks will likely start or continue with their respective hikes with Bank of Thailand (BoT) lifting rates in August and Bank Indonesia beginning its cycle in September or October, depending on consumer cost pressures.
Singapore dollar is most likely to benefit in the current environment, while the Thai baht, Malaysian ringgit and Indonesia rupiah may find some resilience from the greenback strength from rate hike expectations.
- Standard Chartered Plc (Mayank Mishra, strategist in Singapore)
The Philippine peso is unlikely to reverse its current weakening trajectory even if the surprise hike gave some short-term support as it’ll be buffeted by a widening current account deficit.
In Asian FX more broadly, slowing external demand and weak risk sentiment may remain a headwind, too. Singapore dollar is likely to outperform, and the bank remains underweight the Philippine peso and Indian rupee.
- Mizuho Bank Ltd (Vishnu Varathan, head of economics and strategy in Singapore)
Bonds of the hiking laggards -- Bank of Indonesia, BoT -- could suffer as it’s going to be a "very, very bumpy ride as the rising global rates force rate hikes by regional central banks".
Singapore dollar will be a haven and benefit from flows as MAS hikes, while Indonesia looks like a good place to go underweight.
"It’s difficult to fight the tide and think you can get away with liquidity controls for example in Indonesia, when your neighbour is going 75 basis points. Prepare for outflows".
It seems clear that central banks in the region are having to throw in the towel as inflation continues to rise and pressures on their currencies reach pain points
We may see more Asian central banks start aggressively tightening as the burning of foreign currency reserves reach pain points, with Bank Indonesia the next taxi off the rank.
The recent slump in commodity prices adds another headwind on Indonesia and Malaysia.
- Maybank Securities Pte (Winson Phoon, head of fixed-income research in Singapore)
Central banks are racing to the top on rate tightening led by the advanced economies in a bid to tame inflation. Investors should position for a compressed cycle, and we are mildly bullish on US Treasuries.
In Asean local rates markets, we take a differentiated approach: positive on mid/low yielders like Malaysian and Singaporean sovereign bonds.
Investors should be cautious on Indonesia because government bonds have not fully priced in BI rate normalisation risk and high yielders tend to be more sensitive to the deterioration in credit conditions amid aggressive Fed tightening.
