Global trends to influence Asian financial assets

THERE are two global phenomena that we believe will influence the behaviour of Asian financial assets: central bank actions and low oil prices. Monetary policy adjustments could create moderate volatility for Asian fixed-income assets and currencies, while low oil prices will support Asian equities. Asian equities are also attractive given the variety of local economic and political conditions, which are constructive for effective diversification.

In 2015, central banks have regained their power to surprise. This is in contrast to 2014, when central banks' main duty was to provide visibility and guidance on the course of monetary policy. They were keen to avoid surprises, keen to increase the confidence in the financial sphere and be observably constructive for the global recovery that was just underway.

In terms of unexpected central bank actions, 2015 has already seen the European Central Bank beginning a one trillion euro (S$1.55 trillion) open-ended asset purchase programme designed to counter the deflationary forces in the eurozone that was unimaginable a year ago. A few days earlier, the Swiss National Bank had stunned markets by lifting its floor to allow the Swiss franc to float freely, which is a return to its traditional independence. The next possible surprise might be the US Federal Reserve finally lifting its official rates, currently at 0.25 per cent, an increasingly awkward level as the unemployment rate drifts under the 5 per cent mark. The Federal Reserve may move in the course of the second quarter of 2015, but the timing and pace of its future hikes remain uncertain. The expected negative impact on Asian currencies should be limited, as the US dollar has already rallied, well in advance of any hike. Against conventional wisdom, the volatility of most Asian currencies is much lower than euro volatility. The lower local inflation in Asian countries also gives central banks a margin and the ability to support their economies with accommodative monetary policies. We believe the strong US dollar will only translate into a mild weakness in Asian currencies with no Asia currency crisis expected and that the volatility created by expectations of higher US rates may raise opportunities to buy selected corporate bond names.