Donald Trump’s policies appear almost certain to contribute to volatility in Asian markets during 2017. For active fixed-income investors who understand the dynamics of bonds and currencies in the region, this creates opportunities.

At this early point in the new US presidential ascendancy, it’s not entirely clear what the substance of Trump’s policies will be or how successful he will be in implementing them. This in itself is enough to suggest that markets will remain volatile in the short term.

Two policy ideas announced to date are of particular interest to global investors, however: fiscal stimulus to speed the US’s economic recovery and a protectionist stance on cross-border trade. Fiscal stimulus, such as infrastructure investment and tax cuts, is likely to boost nominal GDP and result in further US interest-rate rises, while a crackdown on trade would initially be viewed as a negative for exporting regions, including Asia.

While the likely impact on Asian bonds and currencies is uncertain, we believe there are strong reasons to increase allocations to the region in the current volatile environment, using strategies that aim to enhance performance and manage risk through active, research-driven investing.

SCOPE FOR ASIAN YIELDS TO OUTPERFORM

Although Asian local-currency bond markets have underperformed during the last three years, relative valuations and long-term fundamentals in the region have become more attractive.

Asian currencies are close to their lowest levels in 10 years against the US dollar. While their performance will have disappointed some investors who held them over that time, their current valuations offer an inviting point of entry to the region’s markets.

Yields are also reasonably compelling, with a basket of Asian-currency government bonds offering more than 1.75% above 10-year US Treasuries. Recent history shows that a diversified portfolio of Asian bonds has typically outperformed when US Treasury yields have risen (Display).

While we are not forecasting significantly higher global yields in 2017, the additional yield available in the Asian bond market and the potential for some outperformance in a rising yield environment help to make Asian bonds attractive, in our view.