2022 Fixed Income Outlook | Bracing for Policy Shifts
29 December 2021
Policy tightening and inflation will be key watchwords for fixed income investors in 2022 as the prospects of higher interest rates could cast a pall over bond markets. However, pockets of value are also emerging especially in China which is looking to add fiscal stimulus.

Esther Teo, Senior Director of Fixed Income shares her views on the outlook for bond markets as well as how the team is positioning for the year ahead.

1. 2022 has been described as a ‘transitionary’ year for markets as growth rates normalise and monetary policy tightens. What is your assessment of the global macro backdrop for 2022 and the downside risks to growth?

We expect recovery to be patchy and uneven as uncertainty surrounding COVID-19 continues to linger into 2022. Developed markets (DMs) are expected to outperform emerging markets (EMs), as DMs adopted a more aggressive stimulative stance to combat downward pressure arising from the pandemic in the form of rate cuts and handouts such as unemployment benefits, etc.

In addition, central banks in EMs are embarking on its tightening policy cycle to tamp down inflation which is piercing new highs. This is especially in Brazil and Mexico where strong inflation has fuelled pressure for rate hikes.

Throughout 2021, EMs were challenged on the back of a strong US dollar environment, weak domestic growth, and rising rates. We expect this theme to continue into the 1H’22 mainly driven by growth divergence. However, inflation should start trending downwards by mid-2022 as commodity prices peak and the supply chain crunch eases.

Inflation remains one of the key risks to market. If inflation proves to be stickier especially on the higher side globally, central banks will be pressured to raise rates further. This poses a challenge to the current low interest rate regime and needs to be reassessed by global policymakers and investors.

Other notable events in 2022 include election years in both the US and China respectively. While Republicans are widely expected to make gains in the mid-term elections in November 2022, this will not help US-China relations as there is still bipartisan support to act against China. As such, relations between both countries are expected to remain strained in 2022.

Overall, we taking a cautious stance going into 2022 due to uncertainties stemming from growth and inflationary outlook. However, an economic recession isn’t within the base-case, though growth is expected to be relatively soft.

2. Following blockbuster stimulus in 2021, global central banks like the Fed are now set to withdraw liquidity and hike interest rates next year to tamp down inflation. How will Asian bonds be impacted?

As signalled by the US Federal Reserve at its policy meeting in December, the Fed has guided to markets that it plans to speed up its tapering of bond purchases which would pave the way for 3 rate hikes in 2022.

Liquidity withdrawals and a rising rate environment will be headwinds for fixed income assets that could lead to a widening of credit spreads. Investment Grade (IG) credit spreads are close to historical tight levels.

We see opportunity in the High-Yield (HY) space especially in China’s property sector which is trading at attractive levels due to an ongoing sector crisis where default rates have climbed up significantly. Due to the bond price distortion, certain bond issuances have sold-off indiscriminately.

However, we are taking a very selective approach as some developers might not be able to survive the crisis.

3. It’s been a volatile year for China’s bond market as the Evergrande debt saga unravels in the property sector. With policymakers now looking to provide fiscal stimulus to support growth, is a recovery in sight? What’s the outlook for China bonds in 2022?

As alluded, Beijing has shifted its policy focus to now supporting growth where policymakers have repeatedly emphasised its priority for economic stability. As such, we do not expect a sharp contraction in growth.

However, any impact would be gradual as the government is mindful to not over-stimulate the economy as well which leads to financial instability. As such, recovery is expected towards the 2H’22.

For offshore bonds, we see opportunity in select quality names that are trading at distorted levels as mentioned above.

In the onshore market, we continue to like this space too as Chinese government bonds are trading at a premium versus peers. For example, the 10-Year CGB is trading at 2.8% which is 140bps higher than US Treasury. The sector could benefit further from a gradual opening of capital markets and its inclusion into any major bond indices.

4. How are you positioning our fixed income portfolios? Are there any segments of the bond market you see value in?

In light of headwinds stemming from a rising rate environment and tapering of liquidity, we are taking a cautious and defensive approach. We prefer shorter-tenure bonds to reduce duration and inflation risk.

We see pockets of value in China bonds following the indiscriminate sell-off in the property sector. We also favour Malaysia corporate bonds for its carry as domestic bond yields have risen.

This article has been prepared by Affin Hwang Asset Management Berhad (hereinafter referred to as “Affin Hwang AM”) specific for its use, a specific target audience, and for discussion purposes only. All information contained within this presentation belongs to Affin Hwang AM and may not be copied, distributed or otherwise disseminated in whole or in part without written consent of Affin Hwang AM.

The information contained in this presentation may include, but is not limited to opinions, analysis, forecasts, projections and expectations (collectively referred to as “Opinions”). Such information has been obtained from various sources including those in the public domain, are merely expressions of belief. Although this presentation has been prepared on the basis of information and/or Opinions that are believed to be correct at the time the presentation was prepared, Affin Hwang AM makes no expressed or implied warranty as to the accuracy and completeness of any such information and/or Opinions.

As with any forms of financial products, the financial product mentioned herein (if any) carries with it various risks. Although attempts have been made to disclose all possible risks involved, the financial product may still be subject to inherent risk that may arise beyond our reasonable contemplation. The financial product may be wholly unsuited for you, if you are adverse to the risk arising out of and/or in connection with the financial product.

Affin Hwang AM is not acting as an advisor or agent to any person to whom this presentation is directed. Such persons must make their own independent assessments of the contents of this presentation, should not treat such content as advice relating to legal, accounting, taxation or investment matters and should consult their own advisers.

Affin Hwang AM and its affiliates may act as a principal and agent in any transaction contemplated by this presentation, or any other transaction connected with any such transaction, and may as a result earn brokerage, commission or other income. Nothing in this presentation is intended to be, or should be construed as an offer to buy or sell, or invitation to subscribe for, any securities.

Neither Affin Hwang AM nor any of its directors, employees or representatives are to have any liability (including liability to any person by reason of negligence or negligent misstatement) from any statement, opinion, information or matter (expressed or implied) arising out of, contained in or derived from or any omission from this presentation, except liability under statute that cannot be excluded.
Hello, I'm Nadia. How may I help you?
Talk to Nadia
Not sure what to ask? Try these.
  1. I forgot my i-Access password.
  2. How to perform redemption?
  3. What is the minimum amount to open an investment account?
  4. Checklist for deceased redemption.
  5. What is the best fund for me?
<  Slide to cancel
I'm listening ...
Click to stop recording

Managing Director
Teng Chee Wai is the founder of Affin Hwang Asset Management Berhad (Affin Hwang AM). Over the past decade, he has built the Company to be the fastest growing and only independent investment management house in Malaysia’s top three, with an excess of RM47 billion in assets under management as at 31 December 2018.​

​In his capacity as Managing Director / Executive Director, Teng manages the overall business and strategic direction as well as the management of the investment team. His hands-on approach sees him actively involved in investments, product development and marketing. Teng’s critical leadership and regular participation in reviewing and assessing strategies and performance has been pivotal in allowing the Company to successfully navigate the economically turbulent decade.

Teng’s investment management experience spans more than 20 years, and his key area of expertise is in managing absolute return mandates for insurance assets and investment-linked funds in both Singapore and Malaysia. Prior to his current appointments, he was the Assistant General Manager (Investment) of Overseas Assurance Corporation (OAC) and was responsible for the investment function of the Group Overseas Assurance Corporation Ltd.​

​Teng began his career in the financial industry as an Investment Manager with NTUC Income, Singapore. He is a Bachelor of Science graduate from the National University of Singapore and has a Post-Graduate Diploma in Actuarial Studies from City University in London.
Generic Popup