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Asia Pacific investment grade credit: time to make it a core allocation

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Asia investment grade (IG) credit should benefit from both the end of the US hiking cycle and potential global economic slowdown, with structural demand likely from burgeoning investor interest, explains Omar Slim, co-head of Asia ex-Japan fixed income at PineBridge Investments.
Asia Pacific investment grade credit: time to make it a core allocation

Following a year in which most fixed income assets made a comeback and eked out gains, what does 2024 hold for investors?

Given Asia’s growing economic heft and the stellar returns that Asia US dollar-denominated (USD) IG bonds have consistently posted, we believe it is worth considering Asia IG as a standalone asset class.

Strong 2024 growth prospects create compelling case for Asia IG

Fixed income assets enjoyed a broad rally, sparked by expectations that the US Federal Reserve will start cutting rates in 2024. These views, now the broad consensus, reflected our earlier forecasts, which had informed our portfolio positioning.

By contrast, the next few months look uncertain. The market is still divided on how severe the slowdown will be in the US and globally, once tighter financial conditions take hold. Yet in Asia, the economic cycle has diverged from developed markets. Inflation has been broadly under control, and the region is expected to expand at a healthy clip in 2024. Our forecast calls for 4.5% growth in Asia this year, compared with the International Monetary Fund’s forecast of 1.5% for advanced economies.1

Against this backdrop, Asia IG bonds are an attractive opportunity. They are poised to benefit from both the end of the US hiking cycle and a potential global economic slowdown. Further, while Asia IG spreads are now relatively tight, yields remain attractive, with yield-to-worst at 5.4% as of 29 February 2024.

We also think China is less of a concern than some investors might believe. Although its property sector has presented challenges in the past year for many investors (ourselves included), economic data in the country has somewhat stabilised – though not yet turned positive, in our view.

Our approach is to actively manage our country exposures through market cycles, to manage risk while seeking return opportunities.

For example, in 2023 we were significantly underweight China, with only half the exposure of the broader index (JACI Investment Grade). Nevertheless, we still see pockets of opportunity in the domestic market, and we have been – and continue to be – very selective about picking the right credits.

Beyond index exposure, we have an active allocation to Japan and Australia, where we find attractive value and diversification benefits vis-a-vis other Asian countries.

Growing structural demand for Asia IG

We have observed burgeoning investor interest in Asia IG credit, spurred by two factors: firstly, the growing appeal of Asia assets more broadly; and secondly, the solid risk-adjusted returns that Asia IG bonds have delivered across all time periods.

Asia’s growing market size is hard to ignore. The region’s credit market has more than tripled in size since 2010, to $1 trillion today. Further, some global investors, such as insurers, have a natural incentive to invest in Asia; such investments allow them to match their own liabilities in the region. Others, such as high net worth individuals in Asia, may invest in the asset class due to a home bias.

These preferences also reflect the fact that Asia IG’s risk-adjusted returns have beaten those of other fixed income assets, regardless of the time frame one chooses.

As the chart below shows, over the past 10 years, Asia IG bonds have delivered 3.13% in total returns, compared with US IG’s 2.98% and Global Aggregate IG Credit’s 1.51% -- despite the former being tested by factors both within and outside the region, including by the pandemic, China’s property crisis and US-China tensions.

As a result, we believe investors who do not have any exposure to Asia IG, or are underweight the asset class, risk underperformance in their global fixed income portfolios.


Asia investment grade bonds have outperformed over the past decade
10-year total return history

Source: Bloomberg. Rolling 10-year data as of 31 December 2023. 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 illustration 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.

Putting Asia IG at the core

We believe Asia IG credit is now an asset class that warrants a core allocation in its own right.

In this fragmented and diverse asset class, we believe managers with deep on-the-ground experience navigating Asia’s debt markets across cycles, and a proven ability to excel in both up and down markets, may help investors make the most of these allocations.

We expect to see significant return dispersion in the Asia IG market in 2024, which requires a laser-focused, nimble approach to picking the best risk-adjusted opportunities. Given the likelihood of rate cuts in 2024, we believe the asset class will perform well this year.

To explore how Asian IG bonds could benefit your portfolio, and learn more about our strategy, visit the relevant link below:


1 - Source: PineBridge Investments, as of 29 February 2024.


Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.

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