Finding Quality Income in Asia Investment Grade Bonds

• Against today’s backdrop of a global economic slowdown and significant market uncertainty, US dollar-denominated (USD) Asia investment grade (IG) bonds are well-placed to flourish in an altered investment landscape marked by slowing growth, persistent inflation, and higher rates.

• Capitalizing on the potential benefits of this asset class requires a tried-and-tested credit research and bond-picking process to gain exposure to those companies with the financial strength to withstand a bumpy economic recovery.

• Our team of experienced credit analysts across sectors and markets, combined with on-the-ground insights, provides a blend of bottom-up and top-down research to form a comprehensive credit picture of potential returns as well as risks – along with the agility to reposition portfolios according to market conditions.

Why Asia IG bonds – and why now?

In the wake of robust responses from authorities and central banks on both sides of the Atlantic to the sudden banking shocks in mid-March, we believe higher-quality bonds are a good place to be amid caution over credit exposure.

The renewed appetite for fixed income after 2022’s surge in yields had already spurred global bond markets to a long-overdue milestone: no more negative-yielding sovereign debt. This is a notable achievement given a peak of US$18.4 trillion in such debt in late 2020, according to Bloomberg’s Global Aggregate Index.1

Amid this trend has been a strong desire for high-quality credit. For example, in mid-February 2023, fund flow tracker EPFR reported that US$19 billion had moved into IG corporate bond funds globally since the start of 2023.2

This bodes well for high-quality USD Asia bonds, with yields at 5.3%.3 In addition, the asset class exhibits broadly steady credit metrics, a shorter duration profile, and a relatively higher yield compared with similar-rated global peers. The environment in Asia as an economic bloc is much more benign than in the rest of the world. For instance, some major economies, like China and Thailand, are expected to witness accelerating economic growth this year, unlike in most of the rest of the world. These characteristics can help buffer portfolios against volatility due to the carry.

More specifically, as various market tailwinds gather momentum, exposure to Asia IG bonds is appealing for several reasons.

• An important diversifier. Asia IG bonds have been tested by various market shocks in recent years but have consistently offered attractive risk-adjusted returns.4

• A promising return profile. Asia IG bonds have a track record of lower volatility and higher returns compared with US IG credit and emerging market bonds.

• Steady credit metrics. With a shorter duration profile and attractive yields, Asia IG bonds continue to attract attention from regional and global investors.

• A bright outlook for 2023. Asia is home to some of the few major economies that should see accelerating economic growth as much of the world slows down.

• Capturing China’s potential.  Economic policy announcements in late 2022 add market support, with China likely to play a lead role in a robust Asia IG universe.

The scale of the opportunity in this asset class is difficult to ignore. Out of the overall US$800 billion market for USD Asia bonds in general, roughly 85% is investment grade.5 Yet while Asia IG bonds offer a diverse opportunity set across countries and industries, the region remains under-represented in global fixed income indices.

Realigning portfolios to address this discrepancy also enables investors to capitalize on the evolving landscape in the region.

China is a case in point. For instance, the recent swift and significant policy shifts to end most Covid controls and buoy the property sector, in turn complementing supportive monetary and fiscal measures, offer scope for exposure to high-quality China credits. In identifying the themes likely to shape credit opportunities in China in 2023, we understand the need to tilt toward those companies with the financial strength to ride a bumpy economic recovery.

Why PineBridge? A novel approach to identifying high-quality income

Widening the appeal of Asia IG bonds by finding value opportunities is easier said than done.

At PineBridge, where our investment thesis focuses on allocating to the asset class by favoring issuer differentiation, our approach can be broken down into three core elements:

• A rigorous investment process – creating a diversified portfolio of high-quality Asian bonds that combines bottom-up and top-down research to identify the most compelling opportunities in the Asia IG market.

• A nimble approach to credit selection – offering local insights complemented by global industry expertise to ensure a strategic and tactical approach in this dynamic market.

• A seasoned, on-the-ground investment team – an award-winning investment team6 with deep experience in investing in Asian fixed income markets.

Over the long run, meanwhile, we’re closely monitoring multiyear credit trends, such as China’s economic transformation and Asia’s ongoing growth. Such dynamics bode well for the continued performance of Asia IG bonds.

Our highly selective strategy aims to build a complete credit picture of this asset class, with in-depth security selection, along with duration and yield curve positioning, to seek to maximize total return potential and manage downside risks.

We believe a highly nuanced approach to credit selection can harness the advantages of Asia IG bonds more effectively. It also helps ensure that the portfolio is better positioned to meet the inevitable volatility and return challenges of shifting markets.

A key element of our Asia IG investment strategy is integrating environmental, social, and governance (ESG) factors into the credit selection process, ensuring that each issuer or bond we consider is thoroughly assessed for potential ESG risks.

For instance, we have pinpointed technology, media, and telecom (TMT), real estate, and financial issuers as having the most favorable ESG metrics within the Asia IG space. By country, we see the strongest-rated ESG issuers coming from Singapore, Hong Kong, and South Korea, although Australia and Japan are also high on the list.

Our frequent meetings with issuers as part of a rigorous bottom-up research process offer additional insight into timely opportunities, supporting our agility to reposition portfolios according to market conditions. This is essential in Asia, where investors must continually navigate a changing economic, regulatory, and geopolitical landscape.

The strong fundamentals, competitive profile, and demonstrated risk-adjusted returns in Asia IG bonds offer investors compelling potential benefits. Ultimately, we believe our deep market knowledge and experience in Asia IG bonds can help investors boost their allocations as they seek a more optimal portfolio balance amid recurring market volatility.