2023 Asia ex Japan Fixed Income Midyear Outlook: New Sweet Spots Emerge in High Quality and High Yield Bonds

• In Asian investment grade (IG) credit, features such as broadly steady credit metrics, a shorter duration profile, and higher yields versus similarly rated global peers, along with strong onshore support, make these bonds attractive amid the region’s favorable fundamentals and improving macro backdrop.

• Divergence across segments and issuers in Asia creates attractive alpha opportunities in the region’s high yield (HY) bonds – such as Greater China’s consumption- and tourism-related sectors, plus Indian renewables – driven by credit spreads that remain cheap compared with long-term averages and also with developed market HY names.

• Consistent outperformance of Asian IG US dollar (USD) denominated bonds on a risk-adjusted basis should boost demand for IG, especially if rates normalize. The Asia HY 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.

This puts the region in stark contrast to 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,1 Asian Development Bank,2 and OECD,3 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% 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% of global GDP growth this year.

This backdrop continues to support the Asian fixed income landscape. 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.

Asia USD Bonds Can Provide Diversification

Sources: Bloomberg. Rolling 5-year data as of 28 April 2023. Commodities represented by the Bloomberg Commodity Index, Asia USD Bonds by the JP Morgan Asia Credit (JACI) Index, Asia IG USD Bonds by JP Morgan JACI Investment Grade Index, Emerging Markets (USD) by the JP Morgan EMBI Global Diversified Index, US Inflation Linked by Bloomberg US Inflation Linked index, US IG Credit by Bloomberg US Credit Index, US Equities by S&P 500 index, and Asia ex Japan Equities by the MSCI All Country Asia ex Japan Index.

Asia GDP Forecasts

Source: PineBridge Investments as of 30 May 2023, *IMF World Economic Outlook, updated as of April 2023.

Key Convictions

1. Quality counts in Asian bonds, and IG looks compelling.

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.

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.

Asia IG Credit Spread by Country

Sources: BofA ICE Index, PineBridge Investments as of 26 May 2023. Asia IG and Asia countries are represented by the breakdown of ICE BofA Asian Dollar Investment Grade Corporate Index, US IG by ICE BofA US Corporate Index, and US IG (5-7yr) by ICE BofA 5-7 Year US Corporate Index.

The lower duration profile of Asian high-quality bonds is another key market driver. It results in less spread volatility compared with global peers, plus enables investors to benefit from higher yields for shorter duration.

Another strong technical factor for risk-adjusted returns from Asian IG bonds is the declining level of net new credit issuance, despite the growing pool of funds in the region and increasing appetite among local buyers. For instance, year-to-date gross supply in the primary market was US$46.6 billion at the end of April, a decline of 45% year on year.

China Macro Scenarios for 2023

Source: PineBridge Investments, as of 24 April 2023.

Yet despite China’s 5% GDP target, we see a need for some caution given that the economic recovery will be uneven and macro support will likely remain targeted. Cues from policies are essential to guide exposure in the high-quality segments, coupled with an active approach. 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.

A growing number of high-quality Asian companies are also displaying improving environmental, social, and governance (ESG) 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.

2. Seek selective opportunities in Asian high yield.

Further along the risk spectrum, credit selectors can find significant idiosyncratic opportunities in several key Asian HY sectors. 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, we think the current market dislocation offers disciplined credit selectors scope to uncover attractive risk/reward opportunities.

Asia High Yield Offers Higher Carry and Shorter Duration

Sources: Data as of 26 May 2023, BofA ICE index, PineBridge Investments. Asia HY and countries are represented by the breakdown of ICE BofA Asian Dollar High Yield Corporate Index, and US HY by ICE BofA US High Yield Index.

We 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% of the JACI HY index, down from around 35% two years ago. Beyond these distressed names, Asian HY across China, Indonesia, and India offers a shorter duration profile, a more favorable fundamental outlook, and better yields versus US peers. 

More specifically, Asia’s projected 0.7% default rate compares with 3% for the US, based on Asia’s stable and slightly improving fundamentals.

Asia High Yield Sector Composition

Source: PineBridge estimates, JP Morgan, as of 30 May 2023. Based on JACI Index members; defaulted bonds not eligible for index inclusion.

Asia (ex China Property) Has Lower Default Rate Than US HY

Sources: JP Morgan, PineBridge Investments, as of 30 April 2023.

In line with these trends, we think several key HY themes may appeal to investors:

• Beneficiaries of Asia’s consumption-led recovery. This 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 we expect outperformance.

• Beneficiaries of the decarbonization trend. Indian renewable energy’s favorable ESG positioning is providing a number of fundamental tailwinds for the sector. Valuations remain attractive against similarly rated DM HY bonds.

• The most robust Chinese property developers. While we 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.

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

3. Allocate to Asia’s growth story.

As a region, 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.

Monetary Policy: Most Central Banks Are Near the End of Tightening

Source: Bloomberg, PineBridge Investments, as of 24 May 2023. Forecasts are by PineBridge Investments and methodology is based on an overall assessment of the economy in individual countries as well as the external rates environment.

Further, the latest round of corporate earnings reports has been broadly in line with or modestly above our expectations.

We 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.

For more of our views on what investors and markets can expect in the second half, visit our 2023 Midyear Investment Outlook.