Four reasons to consider Asia credit

7 min read 16 Oct 24

A still relatively nascent but burgeoning asset class, Asian credit can offer fixed income investors the opportunity to tap into Asia’s booming economic story, while also benefiting from an expanding universe of bonds and positive technical support for the market.

Here are four of the key reasons why we believe Asian bonds offer an attractive proposition, highlighting some of the structural factors supporting the market and identifying key pockets of opportunity.
 

1. A maturing market

The size of the Asian bond market has grown significantly over the last 20 years. Between 2006 and 2021 issuance volume of international bonds from Asian issuers grew at an annual rate of about 11% on average, before peaking at about USD 626 billion in 20211. This provides investors a rich hunting ground for identifying opportunities.

Not only has the Asian credit world grown over the years, it has also evolved into an asset class characterised by high credit quality and strong fundamentals. 

In recent years, the narrative around Asian credit has been marred by China’s real estate crisis, marked by the collapse of major developers such as Evergrande and Country Garden. However, the meltdown of the China property sector mainly pertains to the high yield segment of the bond market. The impact on the market as a whole is minimal. Furthermore, after stringent funding restrictions led to a major shakeout, causing over 50% of high yield Chinese developers to default, the sector now comprises less than 2% of the Asian USD credit market2.

Meanwhile, the share of investment grade issuers in Greater China was 87.3% in 2023. This compares to the share of investment grade issuers in the US which stood at 44.9% in 20233. For the broader region, as proxied by the J.P. Morgan Asia Credit index, the proportion of investment grade rated bonds by market weight has grown over the past ten years, standing at 86% in 2023.

The high proportion of investment grade issuers reflects a deleveraging trend which has occurred in Asia, supported by the macroeconomic growth story. 

2006-2021: Issuance volume of international bonds from Asian issuers grew at an annual rate of about 11% on average, before peaking at about USD 626 billion in 2021.

2. Government support

One unique feature of Asian corporate bonds is that many issuers enjoy the strong links with government entities. Around 60% of the J.P. Morgan Asia Credit Index have some linkage with governments. As a result, these companies benefit from government support, in contrast to the Western world where corporates are privately owned. Additionally, these bonds then indirectly benefit from stable sovereign credit ratings. For example, China has an A+ long-term rating from S&P Global, on its belief that its economy will return to self-sustaining growth of above 4% over the next few years4.

However, it is important as bond investors to understand the extent to which government support can be applied to companies. Factors such as strategic importance to the government and how closely linked to the government it is will play a part in deciding how much support investors can expect from the government. We believe it takes an active manager with in-depth knowledge of the market to identify those companies which can benefit from strong support.
 

3. A supportive environment

The appeal of Asian IG corporates is enhanced by positive supply-demand dynamics. The volume of Asian USD IG corporate bonds being issued has notably declined as issuers shift towards more cost-effective domestic funding sources. This is coupled with bond maturities and recurring coupon payments which has led to an overall shrinking market with increased liquidity. This has been the trend for the past two to three years where we see a net redemption environment where principal maturities and coupon payments exceed new bond supply into the market. Ample liquidity can also be observed by the well subscribed new issuances that have come to the market.

Another trend to point out is that Chinese institutions have emerged as key buyers of China USD bonds, driven by widening yield differentials between dollar bonds and onshore renminbi bonds. As a whole, this supply and demand imbalance forms a positive technical support for the market. 

Apart from the demand and supply dynamics acting as a tailwind for Asian credits, Asian corporates have exhibited resilience and steadfast performance supported by stable economic fundamentals.

The growth outlook for Asia is stronger relative to the rest of the world. Most Asian nations have reported steady real GDP growth for Q1 2024, both quarterly and annually. Meanwhile, regional growth is forecasted to be 4.5% for 2024, driven by robust private consumption5

The asset class will likely also benefit as central banks embark on their monetary loosening cycles globally. This, in turn, could prompt lower interest rates across most Asian bond markets.

4. Hidden gems

Within Asian credit, we believe there are hidden gems that offer potential value enhancement. By conducting in-depth analysis of individual credits and sectors, investors can identify opportunities that may have been overlooked.

This is particularly the case in China where we focus on the bottom-up play. We look for mispricings in the market or a value opportunity. For example, we have been overweight in asset management companies because they are strategically important to the government and they are undergoing reform. As a result, these remain under-appreciated as investors have not recognised the companies’ significance and importance to financial stability within China.

We also look at certain IG companies in the China technology sector, which not only trade at higher yields compared to their US peers, but also boast robust balance sheets and net cash positions, making them attractive prospects for investors seeking value within the sector. For example, we consider China technology names which provide IT services and have a strong domestic market franchise, as well as those that produce electronic components. Some of these companies continued to benefit or have already benefitted from the prospect of being upgraded by international rating agencies. 

While many investors cite concerns over the impact of geopolitical tensions on Asian companies, as well as the prospect of increased US tariffs, the policies discussed so far are tilted towards targeting selected sectors such as the exports of advanced chips or AI technology. As a result, we think that the impact would be manageable. This is also because the bulk of these affected bond holdings have been transferred from US accounts into the hands of domestic players since the previous round of proposed sanctions and tariffs. Moreover, the impacted companies within our investable universe is relatively small. However, rising trade protectionism necessitates a more granular, bottom-up approach in credit investments to account for the varying impact on individual Asian firms.

Asian companies are also at the forefront of various areas of technology, such as the production of technology components and digital finance, providing investors with the opportunities to diversify into bonds that not only offer financial returns but also align with future growth industries.

There are countries within the asset class where there is more of a macro theme, such as India, where the growth has been very strong, providing an uplift to the operating environment for the companies we invest in. 

‘Asian corporates have exhibited resilience and steadfast performance supported by stable economic fundamentals.’ 

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.

1 ICMA, ‘The Asian International Bond Markets: Development and Trends’, March 2024.

2 M&G Investments, ‘2024 The year of the wood dragon: Breathing fire into the Asian Credit Market’, February 2024.

3 ‘S&P Global, ‘Default, Transition, and Recovery: 2023 Annual Greater China Corporate Default and Rating Transition Study’, June 2024. 

4 S&P Global, ‘China Ratings Affirmed at A+/A-1’, June 2024. 

5 IMF, ‘Asia’s Growth and Inflation Outlook Improves but Risks Remain’, April 2024.