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Three Common Asian Credit Investing Myths, Debunked
Asian credit has performed strongly this year, but many investors have been too cautious to re-enter the market. In this article, we debunk three common myths that may be holding them back.
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.
Source: Bloomberg, as of 31 Jul 2024. Asia HY: iBoxx ChinaBond Asian High Yield Index (USD-hedged). Global HY: Bloomberg Global High Yield Total Return Index Value Hedged USD. US HY: ICE BofA US HY Index. Asia Credit: JP Morgan Asian Credit Index. Global Corp: Bloomberg Global Aggregate Corporate Total Return Index Hedged USD. US Corp: Bloomberg US Corporate Total Return Value Unhedged USD. The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
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
Source: BlackRock, 31 Jul 2024. *Non-USD bonds hedged back to USD. Neither asset allocation nor diversification can guarantee profit or prevent loss.
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.
Any opinions and/or forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. Source: Bloomberg, 30 Jun 2024.
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.
Source: BlackRock, as of 31 July 2024. Asia HY represented by iBoxx ChinaBond Asian High Yield Index (USD-hedged). Global HY represented by ICE BofA Global HY Index. US HY represented by ICE BofA US HY Index. Asia Credit represented by JP Morgan Asian Credit Index. Global Corp represented by BBG Global Agg Corp USD Hedged. US Corp represented by BBG US Corp.
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.
Source: Bloomberg, Morningstar, as of 31 Jul 2024. Left chart: Peer group is Morningstar Category = Asian High Yield Bond, Base currency = USD. Right chart: Peer group is Morningstar Category = Asia Bond, Base currency = USD, Fund Size > 250 mil USD. Performance is calculated based on the period NAV-to-NAV with dividend reinvested. Performance figures are calculated net of fees. Peer comparison shown is for illustrative purposes only and does not purport to compare all funds in the same investment universe nor does it compare all characteristics of the funds shown.
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.
