Three Common Asian Credit Investing Myths, Debunked

It’s been a rewarding year for portfolios with exposure to Asian credit. Year-to-date, the asset class has outperformed its US and global counterparts. However, some investors remain unconvinced.

It would be fair to assume that the continued volatility in global markets has led to excessive caution about re-entering Asian credit. While true to some extent, concerns are more deep-rooted – with too many investors seemingly believing in shortcomings that no longer hold true in today’s new investment era.

It’s time to dispel some of the commonly held myths about the asset class.

Myth 1: Asia High Yield (HY) does not offer attractive, diversified investment opportunities

The traditional Asian HY universe (represented by the JP Morgan Asia Credit Non-Investment Grade Index, or JACI non-IG Index) has shrunk from USD 303 billion as of end June 2021 to USD 139 billion as of end July 2024. Yet investors don’t need to be limited to this investment universe for returns.

Among opportunities we see in other parts of the market, there is persistent demand for credit from corporates. In addition, lightly syndicated, off-benchmark deals can, with in-depth research, offer a potentially significant premium over benchmarked names.

Further, investors who take a broader definition of Asian HY can also access a much wider set of assets, including non-USD HY bonds as a source of diversification. The iBoxx Asia High Yield Index (“iBoxx AHY”), for example, now includes USD Japanese Credits and CNY / SGD bonds (FX hedged to USD), with exposure no longer concentrated in China. This expanded universe offers more attractive relative value, plus creates scope for strategies to set issuer limits, in turn increasing diversification.

The investment universe has become more diversified within and beyond USD HY

Myth 2: Asia is a riskier investment destination than developed markets.

Asia is well supported by a stable macroeconomic backdrop, led by a bright GDP growth outlook and relatively low forecasted default rates. Unlike the US, where the market sees increased recessionary risk, Asia is at a different stage of the cycle. The region is also expected to benefit from lower US interest rates and a weaker USD, giving Asian central banks more room to cut rates.

These dynamics, combined with the recent risk-off sentiment in global and US markets, bode well for credit, which remains a key driver of growth in Asia.

Also notable for the asset class is how well it is cushioned with higher absolute yield levels at lower duration. As the table below shows, spreads have to widen a lot further for Asian credit to get to 0% in the next 12 months versus global and US fixed income.

Myth 3: Investing in Asian credit is about broad market exposure rather than security selection.

The range of returns in Asia credit can be very broad. As a result, selecting the right funds for exposure to the most appealing set of securities is crucial for returns.

Amid an ever-more complex market landscape, winning strategies will increasingly need to be backed by strong investment teams which offer the best research coverage in terms of both breadth and depth. This process positions those funds to capture the more attractive opportunities across a more diversified investment universe.

Ultimately, we believe this approach and platform will generate stronger sustainable returns in the long run – tapping into an asset class which has evolved and diversified significantly in recent years, plus offers more attractive yields which also act as a risk buffer.