Omar Slim, co-head of Asia ex Japan Fixed Income, and Andy Suen, co-head of Asia ex Japan Fixed Income at PineBridge Investments, have published their mid-year Asia fixed income outlook for 2023, which outlines key themes to watch and their asset allocation strategy.

Broadly steady credit metrics, a shorter duration profile, higher yields, and strong onshore support, make Asian investment grade credit attractive amid the region’s favourable fundamentals and improving macro backdrop, Omar Slim and Andy Suen at PineBridge Investments said in a statement. 

Divergence across segments and issuers in Asia create attractive alpha opportunities in the region’s high yield bonds – such as Greater China’s consumption- and tourism-related sectors, plus Indian renewables – driven by credit spreads that remain cheap, they said. 

“Consistent outperformance of Asian IG US dollar denominated bonds on a risk-adjusted basis should boost demand for IG, especially if rates normalise,” they continued. “The Asia high yield market offers significant idiosyncratic opportunities for credit selectors. Asia is in the enviable position of being able to boast a bright economic outlook for the rest of 2023,” they said.    

This puts the region in stark contrast with 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 Fund, Asian Development Bank, and OECD, 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 per cent GDP growth in 2023, and slightly higher for 2024. Asia’s full year of reopening 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 per cent of global GDP this year. 

“This backdrop continues to support the Asian fixed income landscape,” they said. 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 IG and HY landscapes,” they continued. 

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

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, they said. 

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

Yet despite China’s 5 per cent GDP target, they see a need for some caution given that the economic recovery will be uneven and macro support will likely remain targeted. “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,” they said. 

A growing number of high-quality Asian companies are also displaying improving environmental, social, and governance 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 look for selective exposure to these IG names,” they continued. 

Opportunities in Asian high yield
“Further along the risk spectrum, credit selectors can find significant idiosyncratic opportunities in several key Asian HY sectors,” they added. The broader Asia HY market has been deeply impacted by the prolonged downturn in China’s property sector in the past two years. While the sentiment has not fully recovered yet, they think the current market dislocation offers disciplined credit selectors scope to uncover attractive risk/reward opportunities. 

They expect distressed Chinese property credits to continue to make headlines, with a knock-on effect on index volatility and returns. However, the reality today is that these names only make up 10 per cent of the JACI HY index, down from around 35 per cent two years ago, they said. Beyond these distressed names, Asian HY across China, Indonesia, and India offers a shorter duration profile, a more favourable fundamental outlook, and better yields versus US peers.  

More specifically, Asia’s projected 0.7 per cent default rate compares with 3 per cent for the US, based on Asia’s stable and slightly improving fundamentals. In line with these trends, they think several key HY themes may appeal to investors. 

Asia’s consumption-led recovery continues to support select sectors both domestically and across Greater China, including consumption-driven services and also tourism. The Macau sector is one area where they expect outperformance. 

Indian renewable energy’s favourable ESG positioning is also providing a number of fundamental tailwinds for the sector, they said. Valuations remain attractive against similarly rated DM HY bonds. 

While they are cautious on the distressed space and do not expect a major recovery in the property market, a small number of high-quality names are potential survivors and currently offer reasonable risk/reward, they added. 

With cheaper local funding access due to less hawkish monetary policies, they have also seen multiple tenders, buybacks, or early calls by issuers with strong liquidity positions – a trend they expect to continue. 

Allocate to Asia’s growth story
As a region, they believe that 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,” they said. 
The latest round of corporate earnings' reports have also been broadly in line with or modestly above our expectations. 

They see these dynamics as supportive for Asian IG and HY bonds in different ways. As a result, credit spreads should stay relatively stable in the near term, with potential opportunities to selectively add risk.