Commentary

May 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.

All Asian bond markets rose in May. Malaysian bond market remained the best performer followed by Thailand while bond markets in China and Hong Kong were the worst as Moody's downgraded their sovereign ratings by 1 notch respectively. Meanwhile, Indonesia was rated investment grade by all three major agencies after S&P lifted its rating. The Markit iBoxx ABF Pan-Asia Bond Index rose +1.32% on an unhedged basis, in US dollar terms, while rose +0.17% on a USD hedged basis.

During the month, Chinese bonds gained +0.4% only in USD terms as its sovereign rating was downgraded to A1 from Aa3 by Moody's due to investor concerns over rising debt and the slow pace of economic reforms. May manufacturing Purchasing Managers Index ("PMI") stayed at 51.2 despite some steel production restrictions in northern areas. April growth trend was a bit softer on a Year over year ("YOY") basis: Exports moderated to +8% partly due to fewer working days in this April than last year. Imports slowed to +11.9% as commodity price inflation eased. Industrial production (+6.5%), Fixed Asset Investment ("FAI") (+8.9% YTD) and retail sales (+10.7%) all moderated. Consumer Price Index ("CPI") rose +1.2% while Producer Price Index ("PPI") eased to +6.4%. Finally, slower M2 growth and higher funding costs highlighted intensified monetary tightening.

Hong Kong fixed income market climbed by +0.78% in dollar terms. Moody's lowered its sovereign rating to Aa2 from Aa1 highlighting that credit trends in China would continue to have a significant impact on Hong Kong's credit profile. 1Q17 Gross Domestic Product ("GDP") came in better than expected at +4.3% YoY partly helped by a low comparison base from a year ago. April exports grew by +7.1% YoY, propelled mainly by the sturdy growth in exports to many Asian markets. Retail sales growth held largely stable (+0.1% YoY) in April amid the sustained recovery of visitor arrivals. Finally, April CPI climbed to +2% YoY on a lower comparison base and late Easter.

The Singapore fixed income market rose +1.46% in USD terms. 1Q17 GDP was revised up to +2.7% YoY. Despite that electronics sector index improved to 52.4, May manufacturing PMI slowed to 50.8 and April industrial production moderated to +6.7% YoY. April Non-oil domestic exports (-0.7% YoY) surprised on the downside and electronic shipment growth slowed to +4.8%. March retail sales improved to +2.1% YoY (+0.7% if excluding auto sales). Finally, April CPI edged lower to +0.4% YoY.

Korean bond market advanced by +1.62% in USD led by a stronger won. Moon Jae-in was elected as the country's new president. The Bank of Korea held steady at 1.25% given brightening economic outlook and risk of a faster Fed hiking. 1Q17 GDP was revised higher to +2.9% YoY due to better construction, exports and manufacturing. May exports rose +13.4% YoY on broad based improvement while April industrial production moderated to +1.7%. Finally, May CPI edged up to +2% YoY.

Malaysian bonds surged by +2.5% in aggregate amid ringgit strength and local bond price rally. The Bank Negara Malaysia kept policy rate at 3% and 1Q17 GDP came in better than expected at +5.6% YoY. March exports continued to see strong growth (+24.1% YoY) while industrial production edged slightly lower to +4.6%. April CPI moderated to +4.4% YoY.

Thai bonds rose +2.17% in USD mainly driven by a stronger baht. 1Q17 GDP improved to +3.3% YoY and the Monetary Policy Committee kept policy rate at 1.5%. April exports grew +5.9% YoY while May CPI fell -0.04%, the first negative inflation number in 13 months.

Indonesian bond market gained +1.09% in dollar terms as S&P upgraded its sovereign rating to BBB- on budget curbs. The 10 year government bond yield eased to 6.95% as of 31 May, 2017. 1Q17 GDP improved to +5.01% YoY and Bank Indonesia held reverse repo rate at 4.75%. April CPI rose to +4.2% YoY and exports rose +10.3%. Meanwhile, the Philippine bonds rose +1.1% in USD. The BSP kept its overnight borrowing rate at 3%. 1Q17 GDP slowed to +6.4% YoY but largely confined to government spending. April CPI stayed at +3.4% YoY and March exports surged by +21%.

IMPORTANT NOTES:
For Public Use.

Source: SSGA, as of 31 May 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.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this material are the views of SSGA only through the period ended 31 May 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.

Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

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.

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IBGAP-3476 Expiry Date: 31 May 2018