PERSPECTIVE3-5 min to read

Year Ahead 2024: Asian Credit

12/12/2023

Authors

Ng Peng Fong
Head of Credit, Asia

Drivers of Asian credit markets over 2023

We are past the half year point and despite rising interest rates and turbulence in the banking sector, economic growth has been resilient. Equity market performance has been robust, especially in developed markets. The much anticipated recession risk earlier on in the year has been pushed back further in horizon.

Artificial intelligence, which is a secular growth opportunity, has helped to drive the big technology names higher. On the other hand, China to some extent, has disappointed the market bulls as the post-COVID recovery gradually lost momentum.

Key themes expected to drive Asian bond markets in 2024*

Looking ahead, we see several key potential drivers for Asian credit in 2024:

1. Tighter credit conditions: Rising divergence

Heading into the third year of tight financing conditions, debt servicing pressure is building up for weak borrowers and levered sectors like commercial real estate. Some situations can be value traps, and a robust credit selection process is key to extracting better investment outcomes. As active investors, this is the time to push for stronger bond covenants, better security packages and pricing terms.

2. China’s growth rebalancing: A new normal

The Chinese rebalancing towards quality growth continues. We continue to focus on less levered sectors that benefit from policies and with better growth prospects.

3. The powerhouses of Asia: Not just a China story

Asia Pacific is a diverse region and more than just China. We expect India, Indonesia, and Philippines to post resilient growth. Japanese and Australian credits can also help drive returns. This enables us to construct diversified Asian credit portfolio solutions with healthy yields.

4. Election cycles: A big election year

We will closely monitor the election cycles in Indonesia, India, US and Taiwan, and their subsequent policies. This could result in some volatility.

Key opportunities for Asian credit investors in 2024*

Asian credit yields about 7% in USD terms which is very attractive.**

year ahead 2024 Asian Credit

In China, we prefer sectors including internet platforms, selected hardware technology names, Macau gaming and consumption plays.

In India, the macro backdrop remains supportive, and we remain overweight in Indian renewables and non-banking financials.

Subordinated debt in Asian and Australian banks offer good value. Yields are also attractive in Japanese and Hong Kong insurance companies.

We like front-end triple-B bonds and perpetual bonds with short-dated calls yielding more than 7%.

In high yield, we prefer short dated bonds with good refinancing ability. We seek to identify companies which are likely to buy back their bonds at higher prices.

Finally, in terms of capital gains, we are looking at long-dated, high quality bonds and triple-B rated bonds with steep credit curves.

* For illustrative purposes only and does not constitute any recommendations to invest in the mentioned sectors/countries.

** Source: Bloomberg, JP Morgan, Schroders. As represented by the yield to worst of JP Morgan Asia Credit Index (JACI), as at 23 November 2023. Past performance is not a guide to future performance and may not be repeated

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Authors

Ng Peng Fong
Head of Credit, Asia

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