An Alpha-Rich Core: Asian Investment Grade Bonds

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This is a sponsored article from PineBridge Investments.

A number of factors are increasing the case for investors to hold Asian high quality bonds at the core of a global fixed income portfolio. Uncertainty over Chinese growth and tensions on the Korean peninsula, may have once deterred the risk averse. But changing fundamentals, reduced volatility and rapid growth in the region’s credit markets means there is a plethora of alpha opportunities, for those who know where to look.

China sets the tone
Unsurprisingly, Chinese issuers continue to make up the bulk of Asia’s investment grade credit markets. But Asia’s other large and incredibly diverse economies offer specific opportunities.

China set the tone in the region using the highly anticipated 19th National Congress to reiterate its commitment to the continued gradual liberalisation of its capital markets. Investors also welcomed Beijing’s pledge to promote deleveraging and focus on a new era of prosperity based on quality and sustainable growth.

“There is value in China, particularly within some strategic state-owned enterprises and select real estate and large financial issuers” says Arthur Lau, Managing Director and Co-Head of Global Emerging Markets Fixed Income at PineBridge Investments in Hong Kong. “Further consolidation and M&A activity should lead to increased investment grade credit supply to the US dollar market. They will maintain their investment grade ratings, given their government ownership.”

Don’t ignore South Korea’s strong fundamentals
Rising tensions surrounding North Korea have threatened to overshadow the attractiveness of the South, particularly in the credit markets. However South Korean bonds are attractive – albeit on a selective basis. Several interesting new deals have offered attractive spreads relative to historical levels.

“There is value in China, particularly within some strategic state-owned enterprises.”

“Until now the demand has been driven by the domestic market, given the elevated risk premium” says PineBridge Investment’s Lau. “However, when strictly considering the fundamentals, South Korea has no major issues. There are pockets of risk to be monitored, such as in the consumption and mortgage sectors, but other sectors, such as manufacturing, continue to perform remarkably well.”

Asia’s positive momentum and rebounding trade
Asia is one of the few areas that witnessed positive credit ratings momentum in the past five years.

In November, Moody’s Investors Service upgraded India’s sovereign credit rating, a positive signal for the long term progress of Prime Minister Narendra Modi’s economic and institutional reforms. Moody’s raised the rating to Baa2 from Baa3. This shift reflects confidence in Mr Modi’s policies for fostering sustainable growth and attracting increased foreign and domestic investment.

In addition, the Philippines rose from below investment grade five years ago to being classed investment grade by all three major rating agencies today. Indonesia also witnessed a substantial credit rating improvement, with three major agencies rating it investment grade earlier this year. Furthermore, with trade on the rebound, monetary policy still accommodative, and inflation in check, Southeast Asian economies are doing well.

“We are surgical in our issuer selection and aware of the relatively tight valuations, favouring some Indonesian exposure as well as select names in the commodity space” adds Lau.

Asia High-Quality Credit, a Solid Core for Your Portfolio
The Asian credit market has tripled in value since 2009, growing in both size and appeal. Investor appetite has helped increase liquidity in the region’s market, 80% of which is made up of investment grade credits.

Asia’s gross credit issuance has reached record highs in 2017, with more than US$200 billion expected to come to market this year. However, net issuance is actually much lower, with over US$135 billion in maturing bonds and coupon payments. With limited supply and increasing demand for the region’s favourable bond yields, the technicals are getting stronger.

But Omar Slim, senior vice president of Global Emerging Markets Fixed Income at PineBridge Investments in Singapore says that’s only half the picture. “Asian investors are now the dominant buyers of these credits, holding 81% of market assets. This helps explain the lower volatility the asset class has been experiencing, as domestic buyers investing in their home markets in companies they know and understand, often tend to be “stickier” in nature.”

The Region’s Underlying Strength
Asia’s fundamentals remain steady and is improving in some pockets. Net leverage for investment grade issuers has remained relatively steady after moving lower since 2008 in the aftermath of the financial crisis. By comparison, net leverage for issuers across the globe’s other major regions has increased significantly. Asia debt ratios are now 26% lower than other emerging markets, 30% lower than EMEA, 40% lower than the US, and 53% lower than Latin America.

“Asian issuers are generally well positioned to support current debt levels, even if markets turn volatile.”

PineBridge Investment’s Slim points out that “while there are certainly areas of excess leverage in the region, other areas have seen some deleveraging and, as a whole, Asian Investment Grade issuers are generally well positioned to support current debt levels, even if markets turn volatile.”

A Viable Option as Central Banks Tighten
As central banks around the globe continue to wind down accommodative central bank monetary policies, Asia’s investment grade bond market continues to offer attractive long-term investment potential, particularly given their lower relative duration, and hence lower sensitivity to policy rates and yield movements.

Investing in Asia’s fixed income markets can be complex. However, interested investors could be best served with an active manager that is able to navigate the region’s opportunities and potential pitfalls in order to unlock the full potential of this quickly growing market.

Arthur Lau, CFA, CMA, CPA
Head of Asia Fixed Income, Co-Head of EM Fixed Income
PineBridge Investments
Omar Slim, CFA
Senior Portfolio Manager, Asia Fixed Income
PineBridge Investments

About PineBridge Investments
PineBridge Investments is a private, global asset manager focused on active, high-conviction investing. The firm draws on the collective power of our experts in each discipline, market and region of the world through an open culture of collaboration designed to identify the best ideas. Our mission is to exceed clients’ expectations on every level, every day. As of 30 September 2017, the firm managed US$88.6 billion across global asset classes for sophisticated investors around the world.

For more information on PineBridge Investments’ fixed income solutions, please contact us at FundCentre.Asia@pinebridge.com

Disclosure Statement
This information is for educational purposes only and is not intended to serve as investment advice. This is not an offer to sell or solicitation of an offer to purchase any investment product or security. Any opinions provided should not be relied upon for investment decisions. Any opinions, projections, forecasts and forward-looking statements are speculative in nature; valid only as of the date hereof and are subject to change. PineBridge Investments is not soliciting or recommending any action based on this information.

Opinions: Any opinions expressed in this document represent the views of the manager, are valid only as of the date indicated, and are subject to change without notice. There can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or thereafter.

Information is unaudited unless otherwise indicated, and any information from third-party sources is believed to be reliable, but PineBridge Investments cannot guarantee its accuracy or completeness.

PineBridge Investments Singapore Limited (Company Reg. No. 199602054E) is licensed and regulated by the Monetary Authority of Singapore (MAS). In Singapore, this material may not be suitable to a retail investor and is not reviewed or endorsed by the MAS.

This is a sponsored article from PineBridge Investments.

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