2025 Asia Fixed Income Outlook: A Key Global Diversifier Stays Strong

• Despite a potential rise in geopolitical and monetary policy risks in 2025, we believe Asia’s credit markets are rich with opportunities and that investors who add actively managed Asia credit to global portfolios could enjoy diversification benefits in the form of higher returns and lower volatility.

• Asia investment grade (IG) credit remains attractive relative to developed market IG, with lower leverage than peers in the US and Europe. Given Asia IG’s low correlation to global portfolios, allocations can reduce overall portfolio volatility.

• We expect Asia high yield (HY) defaults to keep trending down in 2025 as the contribution from China’s property sector shrinks and fundamentals stay broadly stable for other constituents. While overall spreads compressed in 2024, the asset class still offers higher yields than other major credit markets and should provide good carry return in the upcoming year.

Elections and central bank actions have dominated global markets over the past year, and we expect unusually high monetary policy risk to remain a key driver in 2025. That said, the impact on Asia’s credit markets will likely be less marked, especially for US dollar denominated Asian bonds.

In China, we continue to believe policymakers will not be releasing any stimulus “bazooka” to resolve current economic challenges. China’s recent stimulus in 2024 has fallen short of market expectations, and economic growth will probably continue to grind lower. That said, we believe Beijing’s focus on managing economic downside risk is positive for credit markets. In 2025 we think policymakers will continue to use the various levers at their disposal to manage the slowdown, and they might announce more aggressive stimulative measures. However, we expect any moves to be generally targeted and selective.

Compounding the existing malaise in China’s economy is the threat of US tariffs on Chinese exports. A marginal increase in such tariffs would be manageable, but the market has not yet priced in the tariffs of 60% or more that incoming US President Donald Trump has signaled. If those come to pass, Beijing will likely need to provide further policy stimulus to support GDP growth of 4%-4.5%.

China is not alone in the impact of the new Trump administration. Other countries in the region, including South Korea and Singapore, are also vulnerable to trade shocks next year. However, the diversified economic structure of these countries, along with an ample fiscal policy buffer, will help mitigate the impact. While we expect economies such as Indonesia, Malaysia, and Vietnam to continue to benefit from the diversification of companies’ supply chains beyond China, we think the broader scope of tariffs could compromise that benefit.

Specifically, Singapore continues to benefit from ample foreign direct investments and investment flows, which are contributing to a near-potential growth rate. Elsewhere in Southeast Asia, Indonesia is set to grow at the same pace as in 2024, with a still-robust long-term growth trajectory driven by fiscal discipline and its move up the manufacturing value chain in some sectors.

Malaysia, too, will grow at similar levels to 2024, bolstered by investment, exports, and tourism. We expect Thailand’s growth to remain anemic, though it will accelerate somewhat in 2025, driven by some fiscal largesse and improving tourism flows. Growth in the Philippines will remain robust at around 5.5%-6%, but we are monitoring the slowdown in its fiscal consolidation.

In India, we expect strong consumption and business confidence to sustain growth momentum into 2025. We believe India’s sovereign rating is on track for an upgrade from BBB- to BBB.

Turning to Japan, we expect economic growth to pick up marginally in 2025, driven by more persistent wage growth and an expansionary fiscal posture. Initial discussions of the 2025 spring wage negotiations indicate that Japan’s largest labor organization will seek to increase base pay by around 3%. This could strengthen the Bank of Japan’s view that domestic inflation is now more entrenched, leading to potential rate hikes. Even so, we expect any central bank moves to be restrained, with policy rates reaching at most 0.75% in 2025.

On the monetary policy front, we expect most regional central banks (with the notable exception of the Bank of Japan) to be biased toward easing in 2025. However, to manage their currency markets, they will likely take their cues from the Federal Reserve.

Asia credit: steady fundamentals and strong technicals in 2025

We expect little impact from the Trump presidency on Asian USD corporate bonds. Asia credits tend to be much less sensitive to trade tariffs, as few of these names are export-oriented.

Asia Credit Has Limited Exposure to US Revenue

Source: J.P. Morgan JACI Composite Total Return Index, PineBridge as of 31 October 2024. For illustrative purposes only. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. Diversification does not necessarily ensure against market loss. Past performance, or any prediction, projection, or forecast, is not indicative of future performance.

We also expect fundamentals for Asia credits to be steady in 2025. Our analysis shows that Asia credits are resilient to higher funding costs and currency volatility, as most have low rating sensitivity to both.

Furthermore, technicals for the asset class remain attractive. While gross issuance is set to increase in 2025, we expect net issuance to stay negative; many issuers continue to enjoy good access to local funding channels, which are relatively cheaper.

ASSET CLASS VIEWS

Asia investment grade (IG): looking good versus developed market peers

Asia IG remains an attractive asset class vis-a-vis developed market IG. Asia IG has lower leverage compared to its peers in the US and Europe. Furthermore, given its low correlation to global portfolios, an allocation to Asia IG can reduce overall portfolio volatility.

Increasing APAC IG Allocations Reduces Portfolio Volatility

10-year annualized volatility

Source: J.P. Morgan, PineBridge Investments as of 29 November 2024. Asia IG represented by the JPM JACI APAC Investment Grade, Global Aggregate Credit by the Bloomberg Global Aggregate Credit Total Return. Any opinions, projections, forecasts, or forward-looking statements represent the views of the manager, are valid only as of the date of this presentation, and are subject to change. Past performance is not indicative of future returns.

In China, we maintain a meaningful underweight position in IG, primarily due to rich valuations as well as concerns about certain segments. We continue to avoid exposure to the Chinese property and local government financing vehicle (LGFV) segments as we await more supportive policies.

Elsewhere, we favor select bonds from Australia, Japan, and Singapore, as valuations of selective sectors in these countries remain compelling against similarly rated peers in the region. We also expect Australia and Japan to continue to benefit from diversification demand, especially following their inclusion in the new JACI APAC index. Credit fundamentals of Japan financials will be boosted by higher local rates as well.

Asia high yield (HY): lower defaults and attractive carry returns in 2025

The Asia high yield market delivered strong performance in 2024, with a total return of 15.85% for the JP Morgan Asia non-investment grade index through November (see chart). This was on the back of declining default rates for the asset class. We expect defaults to keep trending down in 2025 as the China property sector shrinks further and fundamentals for the remainder stay broadly stable. It is also worth noting that when excluding China property, Asia HY corporates have seen lower default rates than their US counterparts for most of the past 10 years.

Asia High Yield Defaults Should Keep Trending Down

Sources: J.P. Morgan, PineBridge Investments. As of 29 November 2024. For illustrative purposes only. Any opinions, projections, forecasts, or forward looking statements presented are valid only as of the date indicated and are subject to change. Diversification does not necessarily ensure against market loss. Past performance, or any prediction, projection or forecast, is not indicative of future performance..

The significant reduction in the contribution of China’s property sector to the JP Morgan Asia Credit Non-Investment Grade Index – from 35% three years ago to 8% in November 2024 – has also increased the diversification benefits for Asia HY investors. While overall spread compressed noticeably in 2024, the asset class still offers higher yield than other major credit markets (see chart). We expect Asia HY to continue to offer good carry return in the coming year.

Asia High Yield Spreads and Yields Compare Favorably to Global Peers

Yield to worst (lhs) and spread duration (rhs)

Sources: J.P. Morgan, Bloomberg. As of 29 November 2024. JACI HY represented by JPM JACI Non-Investment Grade Index, US HY represented by Bloomberg US Corporate High Yield Bond Index, Global HY represented by Bloomberg Global High Yield Index, Europe HY represented by Bloomberg Pan-European High Yield Index. For illustrative purposes only. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. Diversification does not necessarily ensure against market loss. Past performance, or any prediction, projection, or forecast, is not indicative of future performance.

On positioning, we believe the Chinese government’s efforts to manage downside growth and contain systemic risks are positive for certain sectors. We prefer select industrial names that are benefitting from the loose monetary policies and other government measures to contain downside economic risk.

Elsewhere, we believe credits in India will benefit from the benign macroeconomic environment and we continue to favor the renewable energy sector. We also expect fundamentals in Macau’s gaming sector to keep improving, with potentially more rating upgrades to come.

Bottom-up analysis is crucial to tap Asia credit opportunities

In sum, despite a potential rise in geopolitical tensions as a new US president enters the White House, a look under the hood at Asia’s credit markets reveals many opportunities. Investors who add actively managed Asia credit to their global portfolios could enjoy diversification benefits in the form of higher returns and lower volatility.