Bright spots have emerged in Asia’s credit outlook after the global market turmoil in the first quarter of the year. Credit fundamentals have held steady despite pressures from rising US and regional rates and concerns about inflation’s impact on earnings. Given the short duration profile of Asia bonds in general, we think the interest rate trajectory in the US will have minimal impact on the asset class. Nevertheless, we remain underweight on duration.
Source: JP Morgan, PineBridge Investments as of 30 April 2022. For illustrative purpose only. Past performance is not indicative of future results. We are not soliciting or recommending any action based on this material.
The spotlight for the remainder of year will likely remain on China and the impact of its policy easing in stemming the economic slowdown and stabilizing the property sector, which is a key component of the Asia and emerging market high yield market. We believe further easing should support Chinese credits, especially select Chinese property issuers, and we believe this should create opportunities among better-quality issuers that are likely to recover earlier when the property sector stabilizes.
We believe recent volatility in the Asia high yield (HY) market will subside in the next several months on the back of steady credit fundamentals for non-Chinese issuers. China's Covid-delayed recovery means more defaults are expected in the Chinese property sector before stabilization measures take wider effect. This, together with Sri Lanka’s default in May, indicates the expected decline in the Asia bond default rate will be pushed to the first half of 2023 instead of this year.
The extended lockdown in some major Chinese cities in recent months has dampened the effectiveness of policy easing. More supportive measures to property developers and buyers should eventually stabilize the sector and relieve distress among property developers. However, consumption and investment sentiment remain fragile. Physical transactions in the property market continue to disappoint, which means the cash flow pressure on developers persists. The good news is that the onshore credit market and bank credit facility are again available to select property developers, which could offer a new lifeline. On the whole, we believe select higher-quality names in the property sector offer compelling value and will generate decent returns to patient investors in next 12 months.
Meanwhile, some non-China HY credits are benefiting from strong commodity prices and steady credit fundamentals. We continue to favor commodity names as inflation becomes a tailwind for the sector. We expect this strong commodity cycle to last longer due to geopolitical tensions and the reopening of many major economies post-Covid.
Source: JP Morgan, PineBridge Investments as of 30 April 2022. For illustrative purposes only. Past performance is not indicative of future results. We are not soliciting or recommending any action based on this material.
We’re closely watching emerging credit events in two Asian frontier sovereigns. We expect Sri Lanka’s debt restructuring process to take a few months to resolve, while the International Monetary Fund (IMF) review of Pakistan is unlikely to conclude anytime soon. We will remain underweight HY frontier sovereigns until there is greater clarity about the outcomes of these restructurings.
The June rate hike in the US further supports the argument that Asia IG (which largely consists of China credits) will outperform US IG as China continues to ease while the US follows an aggressive tightening cycle. Trade figures from China are strong, and industrial activities show a better-than-expected trend, although consumption still lags due mainly to the lockdown. We think the credit spread premium of Asia IG over US IG, which has narrowed noticeably recently may continue to compress given the supportive policy backdrop and growing recessionary risk concern in the US. Annualized volatility for the asset class has remained comparatively subdued, and we believe the market’s characteristics continue to support this trend.
All these further confirms that the Asia credit market looks attractive because of shorter duration, more favorable policy support and better credit fundamental outlook. (For more on Asia investment grade bonds, see Why Asia Investment Grade Bonds Are an Ally in Volatile Times.)
The reopening theme is strengthening, with Thailand and Indonesia among the latest IG sovereigns to announce significant relaxation to border measures. Economic momentum broadly remains healthy, with inflationary expectations uneven across Asia. Flexibility and selectivity will remain the watchwords for the rest of the year. With strong fundamentals anchoring the market, Asia fixed income should offer investors the stability that may be lacking elsewhere.
For more investment insights, visit our 2022 Midyear Investment Outlook.
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