With the US election over, the once looming risk of a full-blown decoupling between the US and China has diminished, boosting sentiment in Asian fixed income into 2021. While we do not expect US government policy toward China to change materially in the near term, we anticipate a softening of rhetoric under a Biden administration, which may allow the two countries to defuse trade tensions that have built up over the Trump presidency. With the potential change in tone and the growing economic recovery momentum in China, we believe Asian fixed income is well positioned to outperform its global peers.
Against the backdrop of easing geopolitical risk, China is expected to further consolidate its recovery. Thanks to the effective containment of Covid-19, China’s economy has registered a healthy rebound, as indicated by Purchasing Managers’ Index (PMI) and export numbers in recent months. Given current data, we expect China to grow at around 2% in 2020 and 8% in 2021. With ripple effects on demand across the region, we think Asia will, in aggregate, grow at around 7% in 2021 (5.6% ex China).
As such, growth in Asia will outpace developed markets meaningfully in the coming two or three years, which should bode well for the region’s credit market. With a better economic outlook, continued supportive monetary policies, and easing of trade tensions, we believe China will continue to anchor investment sentiment in Asia, helping reduce volatility and attract fund inflows into the region.
Historically, Asian credits, whether investment grade only or encompassing the overall Asia US dollar-denominated bond universe, have the highest risk-adjusted return (Sharpe ratio) when compared to other major asset classes. We believe this salient feature of Asian credits will not change anytime soon.
Sources: Bloomberg. Rolling five-year data as of 30 September 2020. Commodities represented by the Bloomberg Commodity Index, Asia USD Bonds by the JPM JACI index, Asia IG USD Bonds by JPM JACI Investment Grade, Emerging Markets (USD) by the JPM EMBI Global Diversified index, US High Yield by the Bloomberg Barclays US High Yield index, US Inflation Linked by the Bloomberg Barclays US Inflation Linked index, US Equities by the S&P 500 index, and Asia ex Japan Equities by the MSCI MXASJ index. Diversification does not insure against market loss. For illustrative purposes only. There is no assurance that the investment strategies and processes mentioned herein will be effective under all market conditions. Investors should evaluate their ability to invest for a long term based on their individual risk profile, especially during periods of downturn in the market. Past performance, or any prediction, projection, or forecast, is not indicative of future performance. We are not soliciting or recommending any action based on this material.
Asian issuers have managed the Covid-19 challenges much better than initially expected, as corporate earnings results in the first half of 2020 showed. Within the Asia credit universe, there are very limited numbers of issues from directly impacted sectors, such as airlines, tourism, and hospitality. As a result, we expect the fallen-angel risk and default rates in Asia to remain steady at 2% and 3%, respectively, in both 2020 and 2021. As the chart below shows, these levels are substantially below those of emerging markets and the US. More importantly, we believe these risks are manageable through careful active credit selection.
Source: J.P. Morgan, S&P, and PineBridge Investments as of 30 August 2020. EM Corporate 2020 forecasts are based on PineBridge internal analysis, US IG fallen-angel forecasts are based on S&P data, and US HY default forecasts are based on J.P. Morgan data. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any opinions, projections, estimates, forecasts, and forward-looking statements presented herein are valid only as of the date of this presentation and are subject to change.
We believe the biggest fallen-angel risk may stem from the potential sovereign downgrade of India and from Macau’s gaming sectors. However, following some improvements in economic activity and the pandemic situation in India, we have lowered our expectation of a sovereign downgrade in 2021 from 60% to 40%. The potential for a positive surprise in India could translate to more benign fallen-angel risk for the region.
In the high yield market, default risk is largely idiosyncratic rather than systemic, which can be minimized in credit selection with thorough due diligence.
We see a number of tailwinds that may benefit Asian fixed income. For one, the inclusion of Chinese bonds in global indexes is estimated to usher in more than US$150 billion in potential inflows into the Chinese onshore bond market.1 In addition, Asian local currencies should benefit from a likely weakening of the US dollar in the near term. Nevertheless, we prefer high-yielding local currency government bonds and economies that have no near-term refinancing concerns, such as Indonesia, China, and India.
Looking at valuations, on a historical basis, Asian investment grade and high yield credit spreads are cheap.
Data as of 30 September 2020. Source: Top left – JPM, Bloomberg, PineBridge Investments. Asia IG Credit Spread represented by JPM JACI Investment Grade Index. Bottom left – JPM, Bloomberg, PineBridge Investments. Asia HY Credit Spread represented by JPM JACI Non-Investment Grade Index. Right – Bloomberg, PineBridge Investments. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
Given the positive fundamental credit outlook and supportive macroeconomic backdrop, we believe credit spreads should continue to grind tighter. With interest rates likely to stay lower for longer, we do have a slight bias toward Asia high yield credit for total return, although we think select investment grade sectors, such as Chinese infrastructure, industrials, and property, may outperform amid a strong recovery.
Finally, the development of an effective Covid-19 vaccine will be a game-changer, and our baseline scenario is a vaccine by early 2021. Early vaccine trial results from more than one of the leading pharmaceutical companies have been encouraging. Within Asia, tourism-reliant economies such as Thailand and industries such as Macau’s gaming sector should see a definitive turnaround when a vaccine becomes widely available. By extension, sectors like commodities, oil and gas, and banking should follow suit as business activity, human mobility, and consumer sentiment rapidly pick up.
For more PineBridge views on what to expect across economies and asset classes in 2021, visit our 2021 Outlook page.
1 HSBC, as of 25 September 2020.
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Last updated 1 April 2021
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