Lessons from FIFX APAC 2024: How to Mitigate Risk and Maximize Returns in a Volatile Market

The global fixed income market is navigating turbulent waters, shaped by intensifying geopolitical tensions and shifting economic policies. Conflicts like Ukraine-Russia and Palestine-Israel have added new layers of uncertainty, with the former driving up crude oil prices and exacerbating supply chain disruptions. Adding to the complexity is the re-election of Donald Trump in the U.S., sparking widespread speculation about the economic repercussions of his administration’s policies.

Amid these challenges, investors are laser-focused on key factors: the Federal Reserve’s rate decisions, the potential ripple effects on the real economy, and the looming question of whether the U.S. will face a soft or hard economic landing—an outcome that could redefine its growth trajectory.

In this evolving landscape, fixed income remains a cornerstone asset class, but success requires a deeper understanding of the risks embedded in today’s volatile market. This blog gathers key takeaways from the Fixed Income & FX Leaders’ Summit APAC 2024, offering insights into how geopolitical shifts, regional opportunities, and emerging technologies are reshaping the fixed income space.

The Recent Re-Election of Trump: What It Means for Global Investors

The fiscal deficit in US has skyrocketed to US $1.8 trillion for the year of 2024, the highest record outside of the COVID-19 pandemic era. This has posed increasing constraints on government spending and with an alarmingly high interest rates that the FED has raised to cope with inflationary pressures, this may increase borrowing costs in the long run.

Many analysts believe that the FED will continue pro-growth policies under Trump’s administration, but uncertainty about the exact path is causing market volatility, evidenced by recent fluctuations in bond yields and currency values.

The confidence that the government will try to stimulate the economy remains, and if tax burden starts to be reduced, this will create an environment conducive for businesses to increase their profits and even reinvesting in them, stimulating investment and consumer spending. With these significant drivers to boosting economic growth, alongside encouraged competition, an initial flow into the US dollar can happen.

The discussion at FIFX APAC 2024 largely revolves around expectations of pro-growth policies and this market scenario, with a likely possibility of a risk-on environment as carry trade opportunities become more attractive. There are some expectations of the dollar strength to continue in the short term, but we are advised to look for opportunities in undervalued currencies like the Australian dollar. In terms of some Asian currencies, we might see potential for tactical dollar shorts.

While we can say that US’ growth aspects are starting to look more promising, there are concerns about the sustainability of this strength in the long term. In our panel discussion that dives into this contestable statement, some believe that they could have been priced-in – which means their growth has been reflected in the market against turbulent conditions. This opens another set of expectations that further accentuate the dynamics at play in this ever-changing financial space (as we are exposed to more trend reversals and data surprises, investor sentiment begins to swing crazily as well).

Retrospective Outlook: Sticky inflation, global elections, geopolitical instability, and rate cuts - What does the risk vs reward ratio look like for APAC bond & FX investors over the next 12 months and how can you best adapt your fixed income & FX business to stay nimble?

A Telescope into the Fixed Income Landscape of the APAC Region

As for China and other emerging economies, they offer lucrative opportunities for investors. The panel discussion has shed light to prospects of Chinese government bonds and local currency bonds in Asia as they are seen as attractive investment options.

Due to the safety of Japanese Government Bonds (JGBs), particularly given the Bank of Japan's accommodative monetary policy and the global trend towards lower interest rates, some have seen potential in investing them.

With a complex web of factors that could influence the global economy, the fixed income market remains uncertain, with potential for both upside and downside risks. Investors are advised to be selective and focus on high-quality bonds with attractive yields. Diversification across asset classes and regions is crucial to mitigate risk. Given the current market volatility, a cautious approach is recommended to build investment portfolios that may guarantee higher returns and improved performance.

India’s Inclusion in the Global Bond Indices

India is one of the fastest growing and idiosyncratic economies in the emerging market with its growth largely driven by its stable currency, low inflation, and strong fiscal performance that is closely linked to government reforms in critical sectors such as infrastructure, digital innovation and local manufacturing. 

Fireside Chat: How is India’s inclusion in Global EM Bond Index enhancing market liquidity and efficiency and attracting India’s bond market and improving price discovery?

The panel discussion on this topic discussed the government's efforts to make the bond market more accessible to foreign investors, such as the Fully Accessible Route (FAR) program. There was an in-depth dive into the topic of index eligibility, as index companies will only seek quality markets that have high accessibility and consistently delivered strong performance amidst shifting economic shifts.

With India’s inclusion, many believed that this has sent a strong signal to the investor community that their market cannot be ignored, and its substantial contribution to the global indices. Indian Government Bonds (IGBs) in global indices like FTSE boasts an attractive risk-return portfolio while preserving its integrity as a great source of diversification.

This will increase foreign investment, boost liquidity, and potentially lower borrowing costs for India. Lining up with its strong macroeconomic fundamentals and reforms that bolster digitalisation, there may be an increase in investor confidence for this market which has a high chance of generating attractive yields while maintaining a lower correlation with other asset classes.

To conclude the panel discussion, it highlighted India's long-term growth prospects, potential rating upgrades, and the development of a derivatives market for IGBs. Nonetheless, despite inclusion, foreign ownership of IGBs remains low, suggesting further potential for growth and how the appreciation of the US dollar might dampen foreign investor interest in IGBs with lower yields.

Case Study: Understand India's Economic Evolution

ESG Considerations: Driving Capital to Deliver a Positive Impact

ESG is becoming more important in investment decision as it is reshaping the landscape to promote responsible investing and progress in great strides towards risk mitigation. While these benefits are compelling, the quality and consistency of ESG data remain significant and this poses challenges to issuers and investors alike. As there is a lack of standardisation in regulations and investment practices, this might hinder accurate assessments and comparisons.

Due to the rapid evolution of ESG integration and the emerging need to align product offerings with the dynamic client preferences, we see how many fixed income markets are enhancing investments in climate adaptation and environmentally friendly projects while conforming to stringent regulations to propel investor demand and dealing with credibility issues such as avoiding greenwashing by backing up sustainability claims with tangible benefits.

At the end of the day, we need to drive our sustainability agenda to become more forward-looking. Green bond frameworks and other initiatives are promoting sustainable finance and driving capital towards environmentally friendly projects. From reducing carbon emissions to understanding how to pave the way for a carbon-neutral economy, we see the need to strive for greater transparency (particularly for asset managers) and standardisation across different geographies (which ensures investors make informed decisions based on their investment goals and their potential impact).

How Tech is Driving Efficiencies in the Fixed Income Market

With the rapid pace of technological innovation, alongside the rise of electronic trading and dark pools, they are transforming the market and urging buy-side firms to turn to advanced technologies for risk management and navigate a host of macroeconomic factors such as enhanced volatility, inflation, and other frictions.

By leveraging such innovative tools, they can analyse high-frequency data such as growth and liquidity to grasp a deeper understanding of their investment returns. Enhancing diversification is also increasingly crucial to reducing portfolio volatility and supporting stability through different market conditions.

AI and Machine Learning (ML) are being used to analyse large datasets, identify trends, and inform investment decisions. However, their effectiveness is still limited in certain areas, such as credit analysis. Lastly, technological advancements are improving FX trading, particularly in terms of execution strategies and risk management.

Increased Regulatory Scrutiny

Regulators are increasingly concerned about off-channel communications like WhatsApp and Telegram, pre-trading activities for potential front-running and market manipulation, and spoofing especially in cross-instrument and cross-exchange scenarios. Financial institutions need to be aware of these new regulations and ensure compliance.

Final Panel Session: What are the regulatory reforms and technological advancements driving significant transformation and what does the future hold for these asset classes?

Conclusion 

To wrap up, investors need to take measured steps and calculated risks before making an informed investment decision. As the fixed income landscape is uncertain and emerging volatilities are ahead of us, it is important for fixed income firms to understand the intricate complexities behind the rising geopolitical tensions, how US will implement pro-growth policies with the recent administration of Trump, navigating the ESG landscape, and adopting tech integrations for the future of trading. Join us at FIFX APAC Summit 2025 to stay ahead of the curve!