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Sweet spots emerge in Asian high-quality bonds in 2H23

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This is a sponsored article from PineBridge Investments.

Omar Slim, CFA
Co-Head of Asia ex-Japan Fixed Income

Andy Suen CFA, FRM
Co-Head of Asia ex-Japan Fixed Income

Asia is in the enviable position of being able to boast a bright economic outlook for the rest of 2023.

This puts the region in stark contrast to the relatively gloomy prospects globally, with much of the world expected to slow or contract in 2023.

Reports in recent months from the International Monetary Fund1, Asian Development Bank2 and OECD3, for example, all point to accelerating growth in Asia. General resilience combined with domestic demand in China and India, in particular, fuel forecasts of at least 4.5% GDP growth in 2023 and slightly higher for 2024. Asia’s full year of re-opening after the pandemic should also benefit countries such as Thailand and other countries in Southeast Asia. As such, the IMF expects Asia to contribute nearly 70% of global GDP this year.

This backdrop continues to support the Asian fixed income landscape. Although the post-pandemic rebound is uneven and weaker corporate credits continue to face headwinds, the region has also been insulated from the US regional banking crisis.

In short, solid fundamentals and an improving macro backdrop help create a compelling case for investors to tap specific issuers within the more appealing segments of the Asian investment grade (IG) landscapes.

Asian IG bonds look compelling

The IG universe remains a sweet spot for now. The asset class looks attractive with broadly steady credit metrics, a shorter duration profile, and higher yields compared with similarly rated global peers.

Already, Asian USD bonds have shown their effectiveness as a portfolio diversifier due to their consistent outperformance from a risk-adjusted perspective. For example, while many fixed income markets experienced a challenging 2022, Asian bonds – while down overall – significantly outperformed their US IG counterparts, along with other high-quality markets globally.

Regardless of dispersion within the region, Asian bonds are typically well-anchored due to steady leverage and better yields than US IG names, and cheaper credit spreads versus the long-term average.

Sources: BofA ICE Index, PineBridge Investments as of 26 May 2023. Asia IG and Asia countries are represented by the breakdown of ICE BofA Asian Dollar Investment Grade Corporate Index, US IG by ICE BofA US Corporate Index, and US IG (5-7yr) by ICE BofA 5-7 Year US Corporate Index.

The lower duration profile of Asian high-quality bonds is another crucial market driver. It results in less spread volatility compared with global peers, plus enables investors to benefit from higher yields for shorter duration.

Another strong technical factor for risk-adjusted returns from Asian IG bonds is the declining level of net new credit issuance, despite the growing pool of funds in the region and increasing appetite among local buyers. For instance, year-to-date gross supply in the primary market was US$46.6 billion at the end of April, a decline of 45% year-on-year.

Yet despite China’s 5% GDP target, we see a need for some caution given that the economic recovery will be uneven and macro support will likely remain targeted. Cues from policies are essential to guide exposure in the high-quality segments, coupled with an active approach. Ultimately, however, China’s IG credit profile can count on the fact that around two-thirds is directly linked to the central government, fostering one of the lowest-volatility components of the Asian IG universe.

Source: PineBridge Investments, as of 24 April 2023.

Diverse ESG profiles

A growing number of high-quality Asian companies also display improving environmental, social, and governance (ESG) credentials.

Some issuers in markets such as Singapore, Australia, Hong Kong and South Korea are a case in point, with ESG metrics on par with their better counterparts globally.

This momentum – and associated ESG differentiation in Asia via credit spreads – creates new opportunities for investors to calibrate ESG profiles across the region as they seek selective exposure to these IG names.

Asia’s growth story

As a region, Asia looks set to benefit from its strong economic position. Monetary policy seems to have reached an inflection point where most of the tightening by major central banks has already occurred. With almost all Asian central banks at or near the end of their tightening cycles, there should be fewer shocks than in developed markets and a benign inflationary environment.

Further, the latest round of corporate earnings reports has been broadly aligned with or modestly above our expectations.

As a result, credit spreads should stay relatively stable in the near term, with potential opportunities to selectively add risk.

For more of our views on what investors and markets can expect in the second half, visit our 2023 Midyear Investment Outlook.

1Source: IMF, Regional Economic Outlook “Recovery Unabated Amid Uncertainty”, May 2023. https://www.imf.org/en/Publications/REO/APAC/Issues/2023/04/11/regional-economic-outlook-for-asia-and-pacific-april-2023
2Source: Asian Development Bank, Asian Development Outlook April 2023. https://www.adb.org/outlook
3Source: OECD, “Economic Outlook for Southeast Asia, China and India 2023”. https://www.oecd.org/dev/asia-pacific/economic-outlook/Overview-Economic-Outlook-Southeast-Asia-China-India.pdf

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This is a sponsored article from PineBridge Investments.