The Asian credit market marched lower in October post China’s 20th National Party Congress
Asian credit market suffered another challenging month in October. Yields continued to march higher on the back of weak economic data and gloomy corporate outlook, while spreads in Asia pushed significantly wider post China’s 20th National Party Congress.
The J.P. Morgan Asia Credit Index (JACI) was down -3.7% in October, pushing year to date returns to a record -17.0%. Year to date, investment grade credit is down more than -14%, while high yield credit is down -30.7%.
How to navigate Asian credit going forward?
China’s 20th National Party Congress has dominated headlines and has been top of mind for many investors. Post the congress, China credit sold off as investors tried to reassess the new investment landscape and figure which businesses can operate resiliently under this regime.
The main takeaways from the congress include:
- The zero covid policy is likely to stay in the medium term, dragging down consumer consumption and services
- Infrastructure stimulus will play an even larger role in propping up the economy
- The property sector is likely to remain weak, with no major change to policy narratives
- Geopolitical risks may remain high with national security elevated to a key priority
With policy continuity being emphasised, investors’ cautious sentiment is likely to put pressure on China credit in the near term, particularly for the privately owned enterprises. The upcoming major policy events, such as the Central Economic Work Conference and “two sessions”, will be key to watch for more guidance on policy focus going forward. In the meanwhile, against uncertainty in domestic policies and global relations, we believe it will be prudent to keep China exposures low, focusing the limited exposure on higher quality issuers from segments such as quasi-sovereigns and hardware tech where dislocations have been observed.
Whilst returns from Asia credit have been painful this year, we do see light at the end of the tunnel. Current yields in Asia have repriced to levels which well-compensate investors for the potential volatility ahead. While high yield credit remains vulnerable to refinancing risks, the outlook is a lot more constructive within investment grade credit, and it is now not difficult to create a high-grade portfolio yielding close to 6.5%. Thus, we stay defensive while staying invested, anchoring our portfolios with high quality financials and leading industrial names which can potentially offer stable and attractive coupon carry despite the choppy markets.