Unsure About Which Bonds to Buy? Look at PMIs: SEAsia Rates

(Bloomberg) -- The divergence of manufacturing data in Southeast-Asian nations -- Indonesia, Thailand, Malaysian and the Philippines -- may prove to be a harbinger for their bond-market performances heading into 2021.

Purchasing managers indexes for Indonesia and Thailand published this week were both above the 50 threshold, indicating expansion. For Malaysia and the Philippines the figures remained stubbornly below that level. For Indonesia, the gauge has risen for six of the past seven months, while the Thai index has signaled growth for two straight months for the first time this year.

The robust manufacturing numbers chime with the recent performance of debt from the two nations. Indonesian bonds have returned 10% this quarter to dollar-based investors, leading emerging Asia, while Thailand is second at 5%.

While rising PMIs don’t automatically translate into higher bond prices and a stronger currency, they are an important contributor to the overall narrative. In adding another sign of recovery from the coronavirus pandemic, they have helped lure $2.5 billion of inflows into Indonesian sovereign bonds this quarter, the most in more than a year, and $1 billion into Thai debt in the same period.

Worse Picture

The picture is less promising in Malaysia and the Philippines. Malaysia’s PMI stayed below 50 for a fourth month in November, while the Philippines showed a contraction for a second straight period. Bond performance has also been muted in the two countries, with Malaysian and Philippine debt both returning just 1.6% this quarter, the worst performers in emerging Asia.

The sub-par manufacturing figures appear linked to social-distancing measures, which have curtailed both production and consumption. Malaysia’s major economic centers, the capital Kuala Lumpur and the state of Selangor, are both under movement restrictions which are set to expire on Dec. 6, although a surge in infections poses the risk they will be extended.

Malaysia has the highest lockdown score in the region, according to indexes compiled by Goldman Sachs Group Inc., which measure the severity of the restrictions and their impact on mobility. The Philippines isn’t far behind at 45.2, whereas Indonesia has a level of 21.9, and Thailand just 10.2.

The restrictions are having an impact on economic growth. Malaysia last month downgraded its forecast for this year’s gross domestic product to a contraction of 4.5% to 5.5%, citing the lockdown measures. The Philippine central bank unexpectedly cut interest rates on Nov. 19 following a bigger-than-forecast decline in GDP. A decision to ease borrowing costs again will be complicated by rising inflation after price growth accelerated to a 20-month high in November.

The latest batch of PMI data don’t tell the whole story about the relative performance of the four main Southeast Asian economies, but they do help shine a light on their relative underlying strength. The divergence at present appears to correlate with bond performance, and may indicate which debt markets are set to be the strongest at the start of 2021.

What to Watch

• The Philippines will release October trade numbers on Thursday, after exports rose in the previous month for the first time since February
• Malaysia will publish industrial production figures on Friday

Note: Marcus Wong is an EM macro strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice.

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