Omar Slim, co-head of Asia ex-Japan fixed income at New York-headquartered PineBridge Investments, discusses why Asia investment grade credit should be considered as a key portfolio component in 2024, given supportive macro conditions and growing investor interest.

Fixed income assets enjoyed a broad rally in the last two months of 2023, sparked by expectations that the US Federal Reserve will start cutting rates in 2024, according to Omar Slim at US asset manager PineBridge Investments.

Looking ahead, the market is still divided on how severe the slowdown will be in the US and globally, once tighter financial conditions take hold, Slim said in a note. 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. In fact, excluding China, his forecasts show that Asia grew even faster this year, by 4.7 per cent, compared with 4.5 per cent in 2023, he added.

Against this backdrop, Slim believes that Asia IG bonds are an attractive opportunity, poised to benefit from both the end of the US hiking cycle and a potential global economic slowdown. While Asia IG spreads are now relatively tight, yields remain attractive, with yield-to-worst at 5.25 per cent as of 31 January 2024, he continued. 

Although China, and particularly its property sector, has been a big concern in the past year for many investors, Slim said that economic data in the country has somewhat stabilised though not yet turned positive, in his view. 

He manages the firm’s country exposures through market cycles in order to manage risk while seeking return opportunities. For example, in 2023, he was significantly underweight in China, with only half the exposure of the broader index (JACI Investment Grade). Nevertheless, he still sees pockets of opportunity in the market, and he has been selective about picking the right credits. Beyond index exposure, he has an active allocation to Japan and Australia, where he finds attractive value and diversification benefits. 

Structural demand for Asia IG is growing 
Slim has seen investor interest in Asia IG credit, spurred by two factors: the growing appeal of Asia assets more broadly, and the solid risk-adjusted returns that Asia IG bonds have delivered across all time periods. 

“First, Asia’s growing market size is hard to ignore. The Asian credit market has more than tripled in size since 2010, to $1 trillion currently. Furthermore, some global investors, such as insurers, have a natural incentive to invest in Asia,” Slim continued. “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.” 

“Second, Asia IG’s risk-adjusted returns have beaten those of other fixed income assets, regardless of the time frame one chooses,” he continued. “Over the past 10 years, Asia IG bonds have delivered 3.13 per cent in total returns, compared to US IG’s 2.98 per cent and Global Aggregate IG Credit’s 1.51 per cent, despite the former being tested by factors such as the Covid pandemic, China’s property crisis, and US-China tensions." As a result, Slim believes investors who do not have any exposure to Asia IG, or are underweight in the asset class, risk underperformance in their global fixed income portfolios. 

He believes Asia IG credit is now an asset class that warrants a core allocation in its own right and expects to see significant return dispersion in the Asia IG market in 2024. Given the likelihood of rate cuts in 2024, Slim thinks the asset class will do well this year.

Amundi, a European asset manager, is also constructive on Asia in 2024. See more here.