PERSPECTIVE3-5 min to read

Video: Asian credit 2023 mid-year check-in

With robust returns so far in 2023, Asian credit has a number of tailwinds that makes it an attractive asset class.

08/08/2023

Authors

Hilda Cheong
Investment Director - Fixed Income
Ng Peng Fong
Head of Credit, Asia

What key themes do you expect to drive the Asian credit market during the second half of 2023?

Asian credit has so far delivered robust returns in 2023, with investment grade credit outperforming high yield. A key driver of the positive returns has been the spread compression, particularly within investment grade credit.

Asia Pacific is set to contribute to about 70% of global growth in 2023. This provides a more stable environment for companies and banks to operate in.

Under tighter financial conditions for longer, it is understandable that high grade companies (with strong balance sheets and good liquidity) are likely to outperform high yield companies that are over leveraged, which are likely to find refinancing a challenge.  

We continue to expect divergence in performance across the Asia Pacific, with Indian and Indonesian companies expected to perform well.

How is the Mainland China reopening story playing out?

Some investors have been disappointed with the momentum of the growth recovery so far in 2023. However, not all hope is lost. The latest July Politburo meeting recognises the challenges faced within the real estate sector, but measure to ease the restrictions and ensure that the sector has an orderly recovery, are being introduced. At the same time, there are also support measures for other sectors like local government financing vehicles and the new economy sectors.

We believe that sectors that could benefit from the consumption trend and the new economy trends in Mainland China will continue to perform well, such as autos, tourism and Macau gaming. Many companies within these sectors have been reporting strong results and recovering cashflows. We favour high quality issuers.

Outside of Mainland China, where else do you see attractive opportunities in Asian credit?

There are many opportunities across Asia that look attractive.

We particularly like short-dated credit, which offers around 6% yield in US dollar terms, from between one to three years of high quality credit. We believe now is a good opportunity to lock in long-term income from high quality credit at attractive valuations.

Among the sectors, we are most positive about financials and insurance, particularly in the subordinated debt part of the market. We also like sectors where companies can generate strong defensive cash flows, such as utilities and renewable infrastructure.

We find attractive opportunities in South Korea, which have attractive all in yields and credit spreads, especially via new issuances

What does Asian credit offer investors in the current environment?

Asian credit is predominantly an investment-grade credit universe and it offers investors stable quality income generation with an attractive risk-adjusted return profile.

At the same time, investors are getting paid to wait for the interest rate cycle to turn, and when that happens, there is also scope for price appreciation and capital gains. While refinancing is challenging within the high yield segment, this dislocation is offering some select bargains. Yields of selected companies which have good visibility of servicing debt are attractive.

We believe that Asian credit is very interesting at this particular point in time and has a place within an overall diversified investment portfolio.

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Authors

Hilda Cheong
Investment Director - Fixed Income
Ng Peng Fong
Head of Credit, Asia

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