AFTER a year in which most fixed-income assets made a comeback and eked out gains, what does 2024 hold for investors? Given Asia’s growing economic heft and the stellar returns that Asia USD investment grade (IG) bonds have consistently posted, we believe it is worth considering Asia IG as a standalone asset class.
Strong growth makes a compelling case for Asia IG
Fixed-income assets enjoyed a broad rally in the last two months of 2023, sparked by expectations that the US Federal Reserve will start cutting rates in 2024. These views, now the broad consensus, reflected our earlier forecasts, which had informed our portfolio positioning.
Looking ahead, the market is still divided on how severe the slowdown will be in the US and globally, once tighter financial conditions take hold. In Asia, the economic cycle has diverged from developed markets. Inflation has been broadly under control, and the region is expected to expand at a healthy clip in 2024. Our forecast calls for 4.5 per cent growth in Asia this year, compared with the International Monetary Fund’s forecast of 1.5 per cent for advanced economies.
Against this backdrop, Asia IG bonds are an attractive opportunity, poised to benefit from both the end of the US hiking cycle and a potential global economic slowdown. While Asia IG spreads are now relatively tight, yields remain attractive, with yield-to-worst at 5.75 per cent as at Mar 15, 2024 .
China, and particularly its property sector, has been a concern in the past year for many investors (ourselves included). Economic data in the country has somewhat stabilised though not yet turned positive, in our view.
We actively manage our country exposures through market cycles in order to manage risk while seeking return opportunities. For example, in 2023 we were significantly underweight on China, with only half the exposure of the broader index (JACI Investment Grade). Nevertheless, we still see pockets of opportunity in the market, and we have been – and continue to be – very selective about picking the right credits. Beyond index exposure, we have an active allocation to Japan and Australia, where we find attractive value and diversification benefits vis-a-vis other Asian countries.
GET BT IN YOUR INBOX DAILY
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Growing structural demand for Asia IG
We have observed burgeoning investor interest in Asia IG credit, spurred by two factors: the growing appeal of Asia assets more broadly, and the solid risk-adjusted returns that Asia IG bonds have delivered across all time periods.
First, Asia’s growing market size is hard to ignore. The Asian credit market has more than trebled in size since 2010, to US$1 trillion currently. Furthermore, some global investors, such as insurers, have a natural incentive to invest in Asia: Such investments allow them to match their own liabilities in the region. Others, such as high-net-worth individuals in Asia, may invest in the asset class due to a home bias.
Second, Asia IG’s risk-adjusted returns have beaten those of other fixed income assets, regardless of the time frame one chooses. Over the past 10 years, Asia IG bonds have delivered 3.13 per cent in total returns, compared to US IG’s 2.98 per cent and Global Aggregate IG Credit’s 1.51 per cent – despite the former being tested by factors both within and outside the region, including the Covid pandemic, China’s property crisis, and US-China tensions. As a result, we believe investors who do not have any exposure to Asia IG, or are underweight the asset class, risk underperformance in their global fixed income portfolios.
In sum, we believe Asia IG credit is now an asset class that warrants a core allocation in its own right.
In this fragmented and diverse asset class, we believe managers with deep on-the-ground experience navigating Asia’s debt markets across cycles, and a demonstrated ability to excel in both up and down markets, may help investors make the most of these allocations. PineBridge’s fixed income team seeks potential alpha opportunities through two sources: active credit selection and duration management.
We expect to see significant return dispersion in the Asia IG market in 2024, which requires a laser-focused, nimble approach to picking the best risk-adjusted opportunities. And given the likelihood of rate cuts in 2024, we believe the asset class will do well this year.
The writer is co-head of Asia ex-Japan fixed income at PineBridge Investments
Keyword added to your list