Fixed Income Outlook: Navigating the challenges from the COVID-19

Low Guan Yi, Chief Investment Officer, Fixed Income, shares her team’s strategy in the aftermath of the COVID-19 outbreak and explains why they are overweight Chinese property developers within Asian credits.


Feb 2020 | 5 min read

Q. How has your outlook for the global economy changed since the start of 2020?

The global economy was looking to be in a better shape going into 2020. The signing of the Phase 1 trade deal between the US and China in mid-January had boosted business and investor sentiment. Leading global Purchasing Managers’ Index (PMI) and manufacturing data, as well as the tech cycle were showing signs of a recovery. Unfortunately, the outbreak of the coronavirus in Wuhan (now named “COVID-19”) has now cast a cloud over the global growth outlook. Economic data for the first quarter of the year is likely to be poor, especially in China and selected Asian economies such as Singapore, Hong Kong and Thailand, which have strong linkages to the Chinese economy.

While China has locked down several cities and restricted travel, which may help to curb the spread of the virus, these unprecedented measures are likely to be highly disruptive and could significantly impact the China economy and the rest of the world.

Thanks for subscribing!

Follow us :

Q. Many investors have pointed to the sharp rebound of the Chinese and Asian economies after the SARS epidemic in 2003 as a reason to look through the nearterm weakness. What are your thoughts?

While we can look back to 2003 for some guidance, we must be cognizant that the China today is very different from the China then. For one, the service sector accounts for a much larger share (54% in 2019) of the Chinese economy (See Fig. 1) and policy support is more constrained with Fixed Income Outlook: Navigating the challenges from the COVID-19 Low Guan Yi, Chief Investment Officer, Fixed Income, Eastspring Investments, Singapore debt to GDP at 275% of GDP. These, together with China’s structural slowdown, suggest that the economic recovery could be more sluggish compared to the SARS period. As a result of the outbreak, China’s growth is forecasted to slow to 4.8% in the first quarter of 2020 and the full year growth target of 6% appears elusive.

Fig. 1. China: Some notable differences; 2003 and now1

Navigating the challenges chart-01

Meanwhile, the impact on the rest of the world could be larger. Afterall, China’s share of global oil demand has since doubled since 2003 while its share of global tourism spend has increased almost seven-fold. See Fig. 2. With China being a key player in the global supply chain, there have already been reports of component shortfalls in the auto industry and the risk of factory closures in Korea and Europe.

Fig. 2. China’s increased importance to the global economy2

Navigating the challenges chart-02

Q. Does that mean we should be braced for a sharp slowdown in the Chinese economy?

While we are watchful, there are some mitigating factors. In 2003, SARS hit Beijing and Guangdong provinces the hardest, two important economic power houses in China, with a combined GDP share of 14.5%. The COVID-19, on the other hand, is concentrated in Wuhan, and to a larger extent the Hubei province, whose provincial GDP share is only 4.5% of the national total.

In addition, ecommerce was just starting to emerge in 2003 as many in China still did not have internet access. These days, online sales account for 20% of total retail sales in China. As such, the disruption to China’s retail and wholesale businesses could be smaller.

The Chinese government is likely to roll out more accommodative monetary policies. We see room for additional policy rate cuts in the first half of this year. There is also scope for further cuts to the Reserve Requirement Ratio as well as for Medium-term Lending Facility (MLF) and Open Market Operations (OMO) in the coming weeks to inject both short and long-term liquidity into the banking system. At this stage, the People’s Bank of China (PBoC) is likely to prioritise financial stability and growth over inflationary concerns.

Besides easier monetary policies, the government may also roll out more expansionary fiscal policies such as accelerating infrastructure spending, subsidising interest costs, as well as lowering or waiving taxes for affected entities. Industries that supply medical instruments may also receive targeted policy support.

Q. Has the bond market priced in the impact of the COVID-19 outbreak?

Using the SARS episode as a guide and considering the potentially larger economic impact of the current outbreak, it appears that the bond market has only partially priced in the impact of the COVID-19 outbreak.

During the SARS episode in 2003, the MSCI Asia ex Japan Index fell by around 15% from peak to trough, while spreads of Asian credits widened by around 30 basis points, before recovering rapidly.

In the recent COVID-19 outbreak, the MSCI Asia ex Japan Index has fallen by only 8% from peak to trough, while Asian credit spreads have widened by around 17 basis points. See Fig. 3. The performance of Asian USD credits has also been relatively resilient. While credits in selected industries which are directly impacted by the virus (e.g. gaming, retail and tourism) and other higher beta credits experienced some initial softness, the correction has been moderate, and some credits have since rebounded.

Fig. 3. Year to date Asian USD Credit performance and spreads3

Navigating the challenges chart-03

Q. How are you and your team navigating these challenging times?

We may still experience more volatility ahead, which could be potentially triggered by disappointing economic data and/or concerns over the effectiveness of the efforts made to contain the virus. We thus hold an overweight duration position across our portfolios as we expect monetary policy to be accommodative in Asia to counter the adverse economic impact. This also serves as a hedge to our credit exposure, which may experience come under pressure should risk aversion re-emerges.

Nevertheless, we are maintaining our overweight in Asian USD credits, particularly high yield credits, as we see demand for carry to remain underpinned in the longer term with interest rates likely to stay low. We note also that the sectors that could be directly impacted by the COVID-19 virus probably accounts for only 1.4% of the Asian USD credit market (JP Morgan Asia Credit Index).

Within Asian credits, we are overweight high yield Chinese property developers. We believe that pent up demand should drive sales once the situation stabilises in the second half of the year. Many developers have also switched to alternative online sales channels as they shut down sales offices. Furthermore, most developers have a diversified landbank, with the Hubei province (including Wuhan city) accounting for only an average of 4-5% of their total landbank (in terms of Gross Floor Area). Given the robust bond issuance at the start of the new year which took advantage of the easier regulatory measures and strong market demand, many developers have already pre-funded their offshore financing needs. This should help to mitigate liquidity concerns. Meanwhile, the government has many policy levers that can be used to ease financing conditions for developers.

We are watchful for buying opportunities in sectors whose credit spreads may widen due to the direct and/or secondary impact of the COVID-19 virus. These include Macau Gaming, Retail/ Leisure and Hotels, Airlines, Hong Kong property developers, Conglomerates as well as Chinese car distributors. We will look to trim selected weaker industrial issuers that are less likely to receive state support as the government prioritises the more critical sectors.

Interestingly, bond issuance, which has been robust before the Lunar New Year holidays, seems to be resuming despite no clear containment of the virus. Meanwhile, although inflows into Emerging Market (EM) bonds slowed towards late January and the local currency bond market experienced outflows in the first week of February, the inflows into EM hard currency bonds have been relatively resilient.

Nevertheless, we continue to monitor any developments, including high frequency economic data that will shed light on the regional and global impact of the outbreak, which could change our current baseline assumptions.

For Use with Professional Clients / Qualified Investors Only. Not Approved for Further Distribution or Use with the General Public.

The information and views expressed herein do not constitute an offer or solicitation to deal in shares of any securities or financial instruments and it is not intended for distribution or use by anyone or entity located in any jurisdiction where such distribution would be unlawful or prohibited. The information does not constitute investment advice or an offer to provide investment advisory or investment management service or the solicitation of an offer to provide investment advisory or investment management services in any jurisdiction in which an offer or solicitation would be unlawful under the securities laws of that jurisdiction.


Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the strategies managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Where an investment is denominated in another currency, exchange rates may have an adverse effect on the value price or income of that investment. Furthermore, exposure to a single country market, specific portfolio composition or management techniques may potentially increase volatility.


Any securities mentioned are included for illustration purposes only. It should not be considered a recommendation to purchase or sell such securities. There is no assurance that any security discussed herein will remain in the portfolio at the time you receive this document or that security sold has not been repurchased.


The information provided herein is believed to be reliable at time of publication and based on matters as they exist as of the date of preparation of this report and not as of any future date. Eastspring Investments undertakes no (and disclaims any) obligation to update, modify or amend this document or to otherwise notify you in the event that any matter stated in the materials, or any opinion, projection, forecast or estimate set forth in the document, changes or subsequently becomes inaccurate. Eastspring Investments personnel may develop views and opinions that are not stated in the materials or that are contrary to the views and opinions stated in the materials at any time and from time to time as the result of a negative factor that comes to its attention in respect to an investment or for any other reason or for no reason. Eastspring Investments shall not and shall have no duty to notify you of any such views and opinions. This document is solely for information and does not have any regard to the specific investment objectives, financial or tax situation and the particular needs of any specific person who may receive this document.


Eastspring Investments Inc. (Eastspring US) primary activity is to provide certain marketing, sales servicing, and client support in the US on behalf of Eastspring Investment (Singapore) Limited (“Eastspring Singapore”). Eastspring Singapore is an affiliated investment management entity that is domiciled and registered under, among other regulatory bodies, the Monetary Authority of Singapore (MAS). Eastspring Singapore and Eastspring US are both registered with the US Securities and Exchange Commission as a registered investment adviser. Registration as an adviser does not imply a level of skill or training. Eastspring US seeks to identify and introduce to Eastspring Singapore potential institutional client prospects. Such prospects, once introduced, would contract directly with Eastspring Singapore for any investment management or advisory services. Additional information about Eastspring Singapore and Eastspring US is also is available on the SEC’s website at www.adviserinfo.sec. gov.


Certain information contained herein constitutes "forward-looking statements", which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof, other variations thereof or comparable terminology. Such information is based on expectations, estimates and projections (and assumptions underlying such information) and cannot be relied upon as a guarantee of future performance. Due to various risks and uncertainties, actual events or results, or the actual performance of any fund may differ materially from those reflected or contemplated in such forward-looking statements.


Eastspring Investments companies (excluding JV companies) are ultimately wholly-owned / indirect subsidiaries / associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.