In a year in which the macro environment mostly pivoted around one of the biggest demand shocks the region has ever witnessed, fixed income returns in Asia (+7%ytd) have beaten both the post-GFC average and those from other EM regions. More than two-thirds of returns came from duration and carry, which can mostly be attributed to the region's policy response: in terms of virus containment (with North Asia consistently featuring towards the top end of the global activity/mobility heatmap), and fiscal-monetary coordination. As economies race to normalize, beta to global reflation, the hangover of liquidity, and the prospect of better allocations, keep us constructive on Asia macro for 2021, even in the face of likely headwinds from depleted policy capacity. We expect returns to come more from FX as against local bonds, and to be more front loaded (before global reflation expectations force a more material repricing in DM yields).

We look for three key drivers ahead for Asia macro. One, the vaccine rollout, which should favor more traditional export plays in the first half, and rotate towards travel/tourism plays later in the year. It will also likely be a key differentiator for the region between North Asia, which is likely to do a lot better, parts of ASEAN, which could struggle, and somewhere like India, which could transition from being a laggard to a winner. Two, return of flows as global capital gets pulled in by the appeal of relatively attractive carry and valuations in EM, and with Asia enjoying allocations from the same. The tide went out on EM flows for most of 2020, but is now flowing back in. Three, central bank behavior, particularly their willingness/ability to backstop government bonds, and lean against or accommodate FX appreciation pressures. US-China relations will obviously again be important in 2021, particularly where the Biden administration lands versus expectations, both on diverting focus away from tariffs to more structural issues, and on whether it is more successful in applying pressure on China by way of a multilateral approach.

Going into 2021, we like most,

n Owning RMB (to 6.20), KRW (1050) and SGD (1.28) versus USD;

n Buying short-dated Malay paper for MYR gains (to 3.80);

n Owning IndoGBs for carry & duration gains (10Y to 5.75%);

n Paying steepeners in low yielders (Korea 2Y/10Y to 60bp); and

n Paying on dips in India (5Y NDOIS outright or versus bonds)