03 August 2020

Asian Fixed Income Mid-Year Update: Navigating Opportunities in an Uneven Recovery

Asian Fixed Income Mid-Year Update: Navigating Opportunities in an Uneven Recovery

Strong credit fundamentals and favorable technicals built over recent years have helped Asian fixed income mitigate the sudden shock from the Covid-19 pandemic in the first quarter. Asian US dollar bonds have not only withstood the worst of the Covid-19 volatility but have come out as compelling as ever, demonstrating yet again its resiliency in the face of severe market stress.

As the largest economy and issuer in Asia, China anchors the risk sentiment for the region and the asset class. Emerging from the lockdown faster than other major economies, China’s recovery injected a dose of optimism into the market. The J.P. Morgan Asia Credit Index posted positive returns by early June, reversing from -3.6% in the first quarter.1

Fears of a sharp increase in corporate defaults have eased as production and business activities returned to normal following the shutdowns in January and February. Despite a GDP contraction in the first quarter, China is forecast to grow in 2020.

The speed and size of fiscal and monetary easing across the region and the decisiveness of governments, particularly in North Asia, in containing the virus also played an important role in reining in a deeper crisis. Some Asian governments still have room to exercise additional fiscal (rather than monetary) supportive measures should the outlook deteriorate in the short term.

Four factors supporting Asian bonds

We believe the performance of Asian bonds during this period continues to support the case of a stand-alone allocation to the asset class. Four key factors underpin the performance of Asian bonds:

One, whether investment grade or high yield, Asian bonds offer better yields than US and global bonds of the same credit quality. Durations are also lower2, positioning the asset class an attractive diversifier in a global portfolio.

Asian Bonds Offer Better Yields, Lower Duration

Asian Bonds Offer Better Yields, Lower Duration

Source: Bloomberg, PineBridge Investments, as of 29 June 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

Two, credit fundamentals are stronger than other regions. As the chart below shows, net leverage is second lowest versus other regions, and interest coverage has been steadily improving and now the second highest.

Asia Credit Metrics Remain Steady

Comparison of Corporate Net Leverage (x)

"Asia Credit Metrics Remain Steady - Comparison of Corporate Net Leverage (x)"/>

Comparison of Interest Coverage (x)

"Asia Credit Metrics Remain Steady - Comparison of Interest Coverage (x)"/>

Source: BAML, PineBridge Investments. Data as of 31 December 2019. 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.

Three, technicals remain supportive — demand is largely stable, anchored by a growing Asian institutional investor base and supported by liquidity from global and regional monetary easing, which has led to a recent uptick in foreign investor inflows. Supply remains healthy — new issuances have picked up since April after a brief pause in March with over half of total supply coming from China.3 Overall, we expect gross supply this year to be flat compared to last year.

Four, while the default rate is expected to edge up as more vulnerable sectors face credit downgrade pressures, our and the market’s forecast default rate for Asian high yield remains well below that of US, European, and global high yield.

Asia’s Corporate Default Rate Is Expected to Remain Low

Trailing 12-month Asia Non-Financial Corporate High Yield Default Rate
(2008–Mar 2020)

Asia's Corporate Default Rate Is Expected to Remain Low

Source: Moody’s, PineBridge Investments, as of 31 March 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any opinions, forecasts and forward-looking statements presented above are valid only as of the date indicated and are subject to change. *APAC = Asia Pacific. Past performance, or any prediction, projection or forecast, is not indicative of future performance.

To its advantage, the Asian bond market has a strong core in the more financially stable investment grade bonds, which make up approximately 80% of the market.4 We estimate the “fallen angel” risk for this segment at a benign 4%, with some pressure on Indian and Macau issuers. Macau’s gaming companies are weighed down by the collapse in tourism, while Moody’s recently downgraded India’s sovereign rating.

Uneven recovery, dispersed returns

Asia’s recovery is likely to be uneven across sectors and markets. Some headwinds linger —a few Asian countries are still racing to contain the virus amid warnings of a second wave and US-China tensions continue to simmer in the run up to the US presidential election in November. This makes for an environment of highly dispersed returns. Asian sub-investment grade bonds, for instance, have been excessively discounted due to unjustified default fears and should now offer a rich hunting ground for value opportunities for active credit selectors. Both investment grade and high yield spreads have room to compress further, with high yield potentially offering higher upside.

We prefer issuers that have robust cash flows, low refinancing needs in the short term, and strong ties to sovereigns. We have an overweight position on Chinese property companies and central government state-owned enterprises, but underweight on local government financing vehicles. This allocation reflects the nuances of the risk profiles of central and local government entities and their implications on sovereign guarantees. Among Chinese property issuers, which made up more than half of new Asian high yield supply in 20195, established names with stronger balance sheets are preferred. We are also sanguine on Indonesian quasi-sovereign issuers, Asian Tier 2 (T2) bank capital securities, and companies in India’s renewable sector, which is expected to attract continued public and private sector investments. Meanwhile, we see continued weakness in the Indian financial sector, which has struggled with bad loans even before the pandemic. We are also avoiding commodities producers with weaker credit profiles due to the global demand slump. Given low earnings visibility and market uncertainty, we believe there is no substitute for intensive credit research in navigating risks.

Footnotes

1 As of 5 June 2020.
2 Source: Bloomberg, PineBridge Investments, as of 29 June 2020.
3 Source: J.P. Morgan, as of 8 June 2020.
4 Source: J.P. Morgan, as of 31 March 2020.
J.P. Morgan, as of 31 December 2019.


Disclosure

Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.

Banner Curve

Related Insights

View More Insights