While the shadow cast by rising rates, inflation, and geopolitical risk has impacted global fixed income markets, Asia corporate credit spreads have increased in tandem with global risk-off sentiment but are still in line to other markets.
Asia bonds – both IG as HY segments – have a distinct risk profile compared to their peers. They offer a relatively stable source of yield and diversification for investors in times of great uncertainty.
Attractive yields for a shorter time
Asia bonds offer the advantage in this rising rate environment of Asia bonds, which have a shorter duration than their US or global aggregate peers. Asia IG is three years shorter than US IG but has a higher yield. Similarly, a comparison of US HY and Asia HY highlights the latter’s shorter duration, but with nearly double the yield.
Portfolios can absorb the effects of changes in interest rates by combining a higher yield and shorter duration combination. Active duration management at the portfolio and security level should minimise the risk of erosion in bond values and potentially enhance returns.
Advantage Asia: Shorter duration and higher yield
Source: Bloomberg, PineBridge Investments at 31 March 2022. These illustrations are for illustration purposes only. This material is not intended to be used as a solicitation or recommendation for any action.
Low correlation to US Treasury securities
We believe that the rising rate cycles will have a moderate effect on Asia credit in the medium and long term. The sensitivity of Asia IG bonds towards interest rates has been 0.5 R2 over the past 10 years. This indicates moderate correlation.
At 0.0003, the sensitivity within the Asia HY segment of the market is negligible. This suggests that Asia bonds are more favorable than US bonds, especially when there is a rate hike cycle.
Historical correlations between Asia bonds & US treasuries
Source: PineBridge Investments as of April 20, 2022. These illustrations are for illustration purposes only. This material is not intended to be used as a solicitation or recommendation for any action.
The HY sector’s credit spreads continue to trade at historically high levels due to ongoing concerns about the China property space. The segment’s credit spreads are wider than US treasuries and should offer a buffer against the rise in interest rates.
Stable credit fundamentals
Asia corporates have stable or improving key credit metrics. The fundamentals are expected stay strong as South-east Asia, South Korea and South-east Asia emerge from Covid. This environment is expected to support a spread tightening bias towards US bonds.
Asia corporate credit metrics remain healthy
Source: Bloomberg, J.P. Morgan as at 31 January 2022. This is an illustration only. This material is not intended to be used as a solicitation or recommendation for any action.
China is a key component of the Asia bond universe. However, the market offers a variety of issuers from different credit profiles and markets. The Asia IG market in US dollars has surpassed $1 trillion.1In market capitalisation and includes high-quality issuesrs from developing markets like Indonesia and the Philippines. It also includes developed economies such as Singapore, Hong Kong, South Korea and Singapore.
The Asia IG market is unique in that it has significant quasi-sovereigns. Asia IG’s risk of falling angels is still low compared to peers. Credit events that could impact certain sovereigns or Covid-impacted industries such as gaming are also isolated.
Asia HY has experienced a similar rapid expansion in recent decades. However, recent negative headlines, especially from the Chinese property industry, have put pressure upon the market, and its market cap recently declined.
We believe that the sector is overpriced and that higher quality issuers with solid fundamentals and no financing pressures offer attractive return/risk profiles.
While there have been increased risks to Chinese growth in recent months policy easing is expected to intensify over the course of the year. This has led to greater pricing dispersion, and unveiled opportunities, in our view. We believe this will be especially true for higher quality names that we believe will be more benefited by this policy shift.
The HY market offers credit selectors more options than the large Chinese property issuers.
Geopolitical concerns have a limited impact
We don’t expect any direct impact on Asian bonds or economies due to the Russia-Ukraine conflict. The trade between the two countries is very small.
The Asia fixed income market might experience short-term fund outflows and risk aversion. Asia IG and non China HY bonds will be resilient and have no liquidity problem, according to our view. Some commodities and energy-related assets might see an increase in demand due to supply disruptions, which could be beneficial for some industries.
For example, high coal prices could benefit Indonesia’s coal sector. India, a net oil-importing country, could see a greater impact from the rise in oil prices on its economy and public finances. We will continue to monitor the impact of commodity prices on corporate and sovereign credit levels.
We believe that investors should consider adjusting their allocations to reflect the current uncertainty. Active management can be flexible and disciplined and allow investors to access new markets and uncover hidden gaps between fundamentals, prices, and other segments. Portfolios could also be protected from volatility.
A highly selected portfolio of Asia bonds offers investors a strong solution for the challenges ahead. They offer a competitive yield, low rate sensitivities, and strong fundamentals.
For more on PineBridge Investments’ Asia bond solutions, please visit www.pinebridge.com.
Source
1 – Source: J.P. Morgan on 25 February 2022
Disclaimer
All investments are subject to risk, including the potential loss of principal. Past performance does not guarantee future results. Any views expressed by the manager are his opinions and are subject to change. This material is not intended for solicitation or recommendation of any action. This document is issued in Hong Kong by PineBridge Investments Asia Limited. The Securities and Futures Commission has not reviewed this document. Investors should take note of the website www.pinebridge.comThis document and any other website referred in this document have not undergone review by the SFC. They may contain information not authorized by SFC. This document is issued in Singapore by PineBridge Investments Singapore Limited (Company Reg. No. No. 199602054E), licensed by and regulated the Monetary Authority of Singapore. The MAS has not reviewed the advertisement or publication. Investors should be aware that the website is not approved by the MAS. www.pinebridge.comThe MAS has not reviewed or endorsed any other website, including any contents, referred to in this article.
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