Asian markets in focus for fixed income opportunities

While Asia-based fixed income investors have previously looked to the U.S. and other developed markets, many are now refocusing on Asia. Both the investment-grade and high-yield sectors in the region stand out as offering attractive opportunities among carefully selected issuers.

The key drivers of fixed income return in Asia

One of the key reasons why investors are well suited to favor Asian fixed income—in particular, investment grade and targeted areas of the high-yield sector is that the macroeconomic outlook is broadly better in Asia than in other parts of the world. Inflation has been relatively well contained, and the region also has a superior growth outlook. The International Monetary Fund (IMF) forecasts that emerging and developing Asia will expand by 5.2% and 4.8% this year and next, having grown by 5.4% in 2023. By contrast, the IMF projects growth of just 2.1% and 1.7% in the U.S. in 2024 and 2025, and 0.9% and 1.7% respectively in the euro area.¹

Why credit may offer the best opportunities in Asian fixed income

Attractive yields and stable credit fundamentals in Asia—largely as a result of the healthy macroeconomic background, underpin the appeal of Asian investment grade and selected parts of the high-yield sector. Asia fixed income risk adjusted returns have been a relatively strong outperformer across other fixed income classes through historical risk events during the COVID-19 in 2020 or the global financial crisis in 2008-09. We also note that many global investors have under allocated to the Asia fixed income asset class which could risk underperformance in the long run due to the structural improvements we expect to see in the region.

On the other hand, Asian investors who once focused on U.S. Treasuries are now comfortable investing in government-related entities or quasi-sovereigns. Rather than money flowing out into U.S. and European issuers, capital is staying in the region and helping to anchor the overall Asian credit market.

Indonesia is likely a favored area, given that credit fundamentals are on an improving trajectory and the new government will likely maintain supportive policies pursued by the outgoing president, Jokowi Widodo. Although Indonesia has a long history of exporting primary commodities, the country is attempting to move upmarket, selling more refined materials. That makes mining issuers in the country an area of interest, given that they are less likely to be impacted by swings in base commodity prices. Southeast Asian and Korean financials are another area of investment grade that is in demand and may perform well.

Indian renewables are also favored. The government is supporting the growth of the sector. The ruling Bharatiya Janata Party’s manifesto for the 2024 general election included a pledge to continue encouraging the growth of renewables as part of its aim to achieve energy independence by 2047. The sector may also benefit from structural drivers.

Opportunities in China

China remains a driver of Asian growth and has the ability to use fiscal levers to support the economy. The budget deficit of 3.8% recorded in 2023 might be high by Chinese standards, but it is low compared with the developed economies—the U.S. budget shortfall reached 6.3% of GDP in fiscal 2023.^{2, 3} However, there is some disagreement among central and local governments over who should finance any budget expansion. We are seeing signs of increased support from the government to prop up the property sector given the concerns about the sector. We believe growth in China may stabilize and trend around the 4% to 5% level, and the country is likely to remain a large economic engine in the region.

We devote a lot of effort to researching individual sectors in China where macro policy is supportive. So, while we are cautious about the overall outlook for the Chinese economy, we are positive on particular areas such as technology, or sectors supported by structural trends, such as renewables and digitalization. Investment in these trends may support productivity and offset the impact of an ageing population.

Some investors may view U.S./China tensions (and the subsequent lists of economic sanctions) as reasons to stay away from Chinese creditors. However, many of the technology companies that were indeed sanctioned are companies connected to hardware leveraged by the military. Software providers, who too are benefiting from the structural growth in tech, are more targeted at China’s domestic consumers, and as such are an opportunity to gain exposure.

In Hong Kong, the real-estate sector is a key driver of the economy. While we are most worried about the commercial sector, followed by retail—we like some residential issuers, particularly developers of rental units.

It is also important to note we consider issuers in Japan and Australia as part of our remit. That underlines our view that investors should think of the region in terms of the Asia-Pacific rather than just continental Asia. The result is an investment universe that is highly diversified and provides investment opportunities that may meet a range of risk appetites.

Attractive valuations and technical factors driving interest in the higher-yielding Asia markets

While spreads are not overly wide in the high-yield sector, yields are attractive relative to the rest of the world. Positive technical factors are adding to the sector’s appeal. Many well-known and respected issuers are buying back the bonds they are tendering, leading to negative supply amid strong demand. Demand technicals have been supportive in the region, especially in the Asia investment grade space—many in-region investors, such as bank and insurers have a natural need to invest in Asia bonds in order to match their liabilities. This alongside with the rising wealth segment of the investors base has seen increased demand for Asia bonds due to familiarity of the issuers and home bias.

While U.S. high-yield issuance is running at around US$300 billion a month, the figure in Asia is around half that level. At the same time, default rates in Asia excluding Chinese property have been low—not dissimilar to levels seen in the U.S. and other developed markets in recent years.

In the high-yield space, we are focused on various themes benefiting from long-term growth drivers. These include consumer-related names, such as airport operators, gaming businesses, and retailers that may benefit from rising living standards and disposable income across Asia. Green and renewable businesses are likely another favored sector.

There are risks, of course, both to the upside and the downside. Any growth surprise in China might be a positive, while potential challenges include the direction of U.S. monetary policy and political developments that might affect America’s fiscal credibility.

Geopolitical turbulence is another risk. Increasing Sino-U.S. tensions could, for example, prove a challenge, although developments in Asia and the Middle East, and previous friction between Beijing and Washington have not disrupted the asset class unduly to date.

Overall, however, robust macro fundamentals and structural tailwinds mean that Asia, and particularly, Asian credit may be better placed than many markets to ride out any turbulence in the period ahead.