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Asia credit enjoys strong fundamentals
Asia bonds are delivering amid a time of significant volatility, providing a 9.1% gain this year and a yield profile of about 3.9% while demonstrating strong fundamentals
Sheldon Chan 10 Sep 2019

Amid significant volatility for nearly every asset class, Asia credit has stood out this year for its stability. So far in 2019, it has delivered 9.1%, largely on the back of price appreciation. With a yield profile of about 3.9%, the asset class also offers income opportunities at a time when nearly a quarter of global bonds have a negative nominal yield.

Asian corporations are increasingly tapping bond markets to fund growth plans. Appetite for new issuances will likely remain buoyant given attractive valuations, robust economic growth in Asia ex-Japan, favorable liquidity conditions in this low-interest rate environment and higher yielding opportunities.

Asian corporates have demonstrated strong fundamentals. Compared with emerging markets (EM) generally, since 2002, Asian high-yield issuers have consistently lower default rates. More broadly, they have displayed an improving leverage profile that has not impacted profitability. Taken together, these indicators send a positive signal that Asian corporates can grow while showing they can service outstanding debt.

During periods of meaningful global spread widening, Asia credit investment grade has maintained similar defensive properties to its counterparts in the US and Europe over the past 10 years. It is also worth noting that Asia investment grade has a relatively lower duration risk than those in the US and Europe, offering higher yield on shorter-dated issuances.

We believe Asia credit could offer an attractive risk-return and higher yielding profile relative to other asset classes. In this environment, strategic investors have the opportunity to capitalize on price dislocations through informed security selection, particularly as Asia credit grows in both depth and breadth.

Robust economic growth throughout the region and supportive financial conditions could provide a tailwind for risk assets and Asia credit spreads. Increased uncertainty regarding the US-China trade war could, however, weigh on the asset class in the near term, making security selection paramount.

Sheldon Chan is associate portfolio manager of T. Rower Price’s Asia Credit Bond Strategy.

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