Emerging market debt: Spotlight on Asian policy reforms

Asia is a well-known hot spot for rapid change and economic growth. This reputation has drawn global investors looking for the next powerhouse. Two countries that have been at the forefront of the region’s progress have been India and Indonesia. Both the reforms made by their respective governments and the conservative policies carried out by their central banks have helped support and strengthen their bond markets.

In India, Prime Minister Narendra Modi continues to garner the support of his people as he embarks on large-scale reforms for the nation. In the past year, demonetization of the two highest-value rupee notes and the introduction of the nationwide Goods and Services Tax have been important steps to move India’s economy forward, although each of them have hit bumps in the road during their implementation.

Amid these fiscal improvements and technological progress, the Reserve Bank of India (RBI) is keeping the country on the straight and narrow path to stemming rampant inflation and maintaining a stable currency.

Source: CEIC, Bloomberg, June 30, 2017. Note: New CPI series from February 2015 onwards, base year updated to 2012 from 2010 and weights for food and fuel lower. For illustrative purposes only.

Indonesia is also making significant strides in its efforts to pass key reforms. Since becoming prime minister in late 2014, Joko Widodo, or Jokowi, has passed a number of reforms with varying degrees of success, including a tax amnesty program and cuts to fuel subsidies. Bank Indonesia (BI) has been supportive of the nation’s economy as well, helping keep inflation sufficiently low and stable.

Source: Bloomberg, October 2017.

Because of historically low correlations to developed-markets bonds, Indian and Indonesian bonds can be powerful diversifiers within a portfolio. For this reason, they also aren’t as sensitive to a rising rate environment in much of the developed world. Both the RBI and BI have recently cut interest rates by 25 basis points, helping support the health of their economies and bond markets, and balance sheets are strong with foreign exchange (FX) reserves that have continued to increase over the past few years.

Source: Bloomberg, June 30, 2017. For illustrative purposes only.

Emerging markets in Asia continue to develop and strengthen, and the case for emerging-markets debt is strong when one considers the potential for additional yield and enhanced diversification. Investors searching for value and idiosyncratic opportunities in this asset class can find a world of potential in the bond markets of India and Indonesia.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase). Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.