Commentary

September 2017

Important Risk Disclosure for PAIF

  • ABF Pan Asia Bond Index Fund ("PAIF") is an exchange traded bond fund which seeks to provide investment returns that corresponds closely to the total return of the Markit iBoxx ABF Pan-Asia Index ("Index"), before fees and expenses, and its return may deviate from that of the Index.
  • PAIF primarily invests in local currency government and quasi-government bonds in eight Asian markets, comprising of China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand.
  • Investment involves risks, including risks of exposure to bonds in both developed and emerging Asia markets. Investors may lose part or all of their investments.
  • PAIF is not "actively managed" and will not try to "beat" the market it tracks.
  • The Executives' Meeting of East Asia and Pacific Central Banks group (the "EMEAP") member central banks and monetary authorities are like any other investors in PAIF and each of them may dispose of their respective interest in the Units they hold. There are no guarantees that the EMEAP member central banks and monetary authorities will continue to be investors in PAIF.
  • The trading price of PAIF may differ from the underlying net asset value per share.
  • PAIF may not be suitable for all investors. Investors should not invest based on this marketing material only. Investors should read the PAIF's prospectus, including the risk factors, take into consideration of the product features, their own investment objectives, risk tolerance level etc and seek independent financial and professional advices as appropriate prior to making any investment.

Asian bond markets fell slightly in aggregate in September. The US Fed initiated balance sheet run-off and President Donald Trump proposed the biggest US tax overhaul in three decades. Also, S&P downgraded sovereign rating in China and Hong Kong by 1 notch, respectively. Malaysian bond market turned to the best performer for the month while Korean bond market stayed at the bottom. The Markit iBoxx ABF Pan-Asia Bond Index fell -0.24% on an unhedged basis, in US dollar terms, while rose +0.13% on a USD hedged basis.

During the month, Chinese bonds fell -0.64% in USD terms as S&P cut its sovereign rating to A+ from AA- citing increased risks in the nation after prolonged period of strong credit growth. While the most recent September manufacturing Purchasing Managers Index ("PMI") accelerated to 52.4, most August monthly releases surprised on the downside on a Year over year ("YoY") basis: Exports moderated to +5.5% led by weaker exports to major developed markets while imports went stronger to +13.3%, led by stronger commodities imports. Industrial production (+6%), retail sales (+10.1%) and Fixed Asset Investment ("FAI") (+7.8% YTD) all softened. Consumer Price Index ("CPI") increased to +1.8% and Producer Price Index ("PPI") rose +6.3% driven by higher commodity prices. Finally, the tighter financial condition would likely slow investment growth.

Hong Kong fixed income market inched lower by -0.54% in dollar terms as S&P downgraded HK to AA+ from AAA due to potential spillover risks to the city should deleveraging in China prove to be more disruptive than expected. The lagging 2Q17 industrial production inched up to +0.4% YoY and PPI moderated to +3.7%. August exports inched up to +7.4% YoY, as total exports to Asia grew while decreases were seen in exports to the UK and US. Retail sales grew moderately by +2.7% YoY in August mainly supported by the prevailing sanguine consumer sentiment amid a full-employment situation. Finally, August Consumer Price Index ("CPI") ticked down to +1.9% YoY and unemployment rate was unchanged at 3.1%.

The Singapore fixed income market fell -0.24% in USD terms. September PMI went higher to 52 with electronics sector index increasing to 53.6. August industrial production moderated to +19.1% YoY while Non-oil domestic exports strengthened to +17% YoY with electronic shipments surging by +21.7%. July retail sales moderated to +1.8% YoY (+2.2% if excluding auto sales). Finally, August CPI eased to +0.4% YoY.

Korean bond market dropped by -1.8% in USD dragged down by continuing won weakness. September exports surged +35% YoY and August industrial production improved to +2.69%. Finally, September CPI eased to +2.1% YoY.

Malaysian bonds rose +1.45% in aggregate thanks to ringgit strength. The Bank Negara Malaysia held policy rate steady at 3% as widely expected. July exports surged to +30.9% YoY. July industrial production accelerated to +6.1% YoY and August CPI rose +3.7% due to higher fuel prices.

Thai bonds edged down by -0.02% in USD. The Monetary Policy Committee kept policy rate at 1.5% as expected. August exports accelerated to +15.8% YoY and September CPI climbed to +0.86%.

Indonesian bond market rose +0.86% in dollar terms. The 10 year government bond yield eased further to 6.5% as of 29 September, 2017. The Bank Indonesia cut its reverse repo rate by another 25bps to 4.25% likely responding to soft inflation. August CPI eased further to +3.8% YoY while exports (+19.2%) beat expectations driven by manufactured goods. Meanwhile, the Philippine bonds advanced by +1.26% in USD. The BSP kept its policy rate unchanged at 3%. August CPI climbed to +3.1% YoY while July exports improved to +10.4%.

IMPORTANT NOTES:
For Public Use.

Source: SSGA, as of 30 September 2017.

This document is issued by State Street Global Advisors Asia Limited ("SSGA") and has not been reviewed by the Securities and Futures Commission of Hong Kong.

The views expressed in this material are the views of SSGA only through the period ended 30 September 2017 and are subject to change based on market and other conditions.

This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events, or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions and analyses made by SSGA in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes appropriate in the circumstances, many of which are detailed herein. Such statements are subject to a number of assumptions, risks, uncertainties, many of which are beyond SSGA's control. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and SSGA shall have no liability for decisions based on such information.

Past performance is not a guarantee of future results.

Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income.

International government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.

Investing involves risk including the risk of loss of principal.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise bond values and yields usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.

Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

This document may not be reproduced, distributed or transmitted to any person without express prior permission. This document and the information contained herein may not be distributed and published in jurisdictions in which such distribution and publication is not permitted.

The Markit iBoxx ABF Pan-Asia Index referenced herein is the property of Markit Indices Limited and is used under license. The PAIF is not sponsored, endorsed, or promoted by Markit Indices Limited or any of its members.

iBoxx is a registered trademark of Markit Indices Limited, a wholly-owned subsidiary of Markit Group, and may not be used without the owner's written permission. A license is required to refer to or use any Markit iBoxx index in any financial products.

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IBGAP-3758 Expiry Date: 10/31/2018