This is a sponsored article from PineBridge Investments.
Strong credit fundamentals across Asia are expected to continue to bode well in 2024, but selectivity remains key. PineBridge’s co-heads of Asia ex-Japan fixed income, Omar Slim and Andy Suen, share their convictions in Asia investment grade and high yield in the new year.
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 Q3 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 fuelling 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.
Key Convictions
1. Asia USD investment grade bonds remain a well-anchored, high-quality asset class.
Broadly, Asia USD investment grade (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 external shocks (for instance, unprecedented monetary policy hikes) and internal shocks (strict and lengthy Covid restrictions in Asia, which impacted growth). This market segment 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
Sources: Bloomberg. Rolling 10-year data as of 29 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 illustrative purposes 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 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 its shorter duration, which buffers rate volatility; and demand underpinned by local investors with a strong home bias, mitigating the asset class’s volatility.
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 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 high yield (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 and corporates’ ability to access alternative financing in local markets.
Asia (ex-China property) HY corps has a lower default rate 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.
Staying focused
Ultimately, buoyed by Asia’s strong macro picture, the region’s credit fundamentals remain strong, especially in the highest-quality segment.
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. Source: 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. Source: 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. Source: IMF, World Economic Outlook, October 2023. https://www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023
4. Source: JP Morgan as of 31 August 2023.
Disclosure
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 re-publication or sharing 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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This is a sponsored article from PineBridge Investments.
