The broad Asian macro environment stands out globally.
The region is appealing from a growth perspective, with the International Monetary Fund (IMF) recently upgrading its forecast for the Chinese economy from 5% to 5.4% in 2023 and from 4.2% to 4.6% in 20241. The upgrade reflected stronger-than-expected growth in the third quarter 2023 and new policies announced to support the economy. Overall, the Asian region is expected to grow by 4.6% and 4.2% in 2023 and 2024, respectively2. The global economy by comparison is only forecast to muster 3% growth in 2023 and 2.9% in 20243.
Another key factor fueling Asia’s broad appeal is central bank policy. Most Asian central banks have either completed or nearly completed their tightening efforts. Further, inflationary pressures have been milder in Asia than in the rest of the world, and have stayed within central bank target ranges in most countries.
These dynamics should translate into healthier corporate fundamentals, as the economic environment remains healthy.
1. Asia US dollar (USD) investment grade (IG) bonds remain a well-anchored, high-quality asset class.
Broadly, Asia USD IG bonds continue to provide compelling risk-adjusted returns relative to their global peers, with consistent outperformance over a 10-year timeframe as of 31 December 2023 (see chart below).
This asset class has been heavily tested over the past few years by both external shocks (unprecedented monetary policy hikes, for instance) as well as internal shocks (strict and lengthy Covid restrictions in Asia, which impacted growth). This segment of the market has remained well-anchored throughout those episodes, with lower drawdowns versus peers.
Asia USD IG bonds have provided compelling risk-adjusted returns
10-Year total return history
Asia USD Bonds by the JPM JACI index, Asia IG USD Bonds by JPM JACI Investment Grade, EM Sovereign (USD) by the JPM EMBI Global Diversified index, EM Sovereign IG (USD) by the JPM EMBI Global Diversified index Investment Grade, US IG and US IG (5-7yr) by BofA ICE index, US Inflation Linked by Bloomberg US Govt Inflation-Linked All Maturities Total Return Index, Europe IG by Bloomberg Pan European Aggregate Credit, Global Aggregate Credit IG (USD) by Bloomberg Global Agg Credit Total Return Index, Asia Local Currency by Bloomberg Asia Local Currency Index Diversification does not insure against market loss. For illustrative purposesly only. There is no assurance that the investment strategies and processes mentioned herein will be effective under all market conditions. investors should evaluate their ability to invest for a long-term based on their individual risk profile especially during periods of downturn in the market. Past performance, or any prediction, projection or forecast, is not indicative of future performance.
Other appealing features of Asia USD IG bonds include significantly lower interest rate risk given their shorter duration, which buffers rate volatility; and demand underpinned by local investors with a strong home bias, mitigating the volatility of the asset class.
The resilience of Asia USD IG bonds has also prevailed amid the negative headlines in China’s property sector. In reality, the impact on the Asia IG universe has been marginal – while China is the biggest issuer in the market, representing about 30%-40% of issuance (depending on the index used to proxy the market), property makes up less than 3%.
We continue to believe bond selectivity is a key performance differentiator. Specifically, we see opportunities in a few areas in 2024, including Korean financials, some Indonesian quasi-sovereign issuers, Japanese and Australian financials and corporates, and several Indian and Southeast Asian issuers.
Another consideration for investors in the asset class is the relatively low issuance level in Asia’s primary market. In particular, we expect the size of the region’s credit landscape to shrink in 2024 as maturities exceed new issuances by around two times.
2. Asia high yield (HY) offers attractive risk-reward potential, excluding the China property sector.
The prolonged downturn in China’s property sector over the past two years has triggered a remarkable shift in the composition of the Asia HY universe. The China property sector has shrunk from around 35% of the Asia HY market in mid-2021 to less than 7%4 as of end-December 2023. As a result, the weightings of financials, consumers, and utilities have grown and now collectively account for around half of the index weight on aggregate.
Within today’s Asia (ex China property) HY corporate space, historical default rates have been relatively lower than the US HY default rate. We expect defaults to stay low on the back of the resilient macro backdrop as well as corporates’ ability to access alternative financing in local markets.
Asia (ex China property) HY corps have lower default rates than US HY
Sources: JP Morgan, PineBridge Investments. As of 29 December 2023. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. We are not soliciting or recommending any action based on this material. Past performance, or any prediction, projection or forecast, is not indicative of future performance.
Selection to express specific credit views will be key to potentially benefit ahead of a market recovery in Asia HY. We see several sectors within Asia HY that may offer alpha potential in 2024:
- Beneficiaries of the ongoing reopening and recovery themes in the region, particularly in certain consumption-related sectors like gaming, retailers, shopping malls, airports, and TMT (technology, media, and telecom).
- Beneficiaries of the drive toward decarbonisation, especially Indian renewable energy.
- Corporates across multiple sectors – particularly commodities – with strong liquidity positions as a result of strong operating cash flows and access to cheaper local funding sources.
Ultimately, buoyed by Asia’s strong macro picture, the region’s credit fundamentals, especially in the highest-quality segment, remain strong.
As a result, investing in Asia USD IG and HY bonds should enable investors to benefit from the portfolio diversification and reliable income opportunities that the region’s markets can offer.
For more viewpoints from senior investment leaders at PineBridge Investments, please visit the 2024 Investment Outlook: Opportunities in Unsyncable Markets.
1 - IMF, 7 November 2023. https://www.imf.org/en/News/Articles/2023/11/07/pr23380-imf-staff-completes-2023-article-iv-mission-to-the-peoples-republic-of-china
2 - IMF, APAC Regional Economic Outlook, October 2023. https://www.imf.org/en/Publications/REO/APAC/Issues/2023/09/27/regional-economic-outlook-for-asia-and-pacific-october-2023
3 - IMF, World Economic Outlook, October 2023. https://www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023
4 - JP Morgan as of 31 August 2023.
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