Where are we seeing opportunities in Asia credit?

Key market highlights across August 2022

After the brief respite seen in July, Asian credit markets reverted to negative returns in August, with Asia high yield outperforming Asia investment grade.

• Read more: Asia fixed income making a come back?

During the month, yields rose with better-than-expected US jobs number and a hawkish US Federal Reserve statement at the Jackson hole event, while spreads tightened alongside a series of positive news stemming from China, such as more funding support for selected China property developers, and the US China audit inspection deal.

This brings YTD JACI (J.P. Morgan Asia Credit Index) returns to the worst since the index inception, with total return of -10.7% in USD terms (the investment grade segment down -9.1% and the high yield segment down -18.5%).

Considering the extent of selloff seen YTD, we believe Asian credit yields are increasingly looking attractive.

How are we positioned in Asia fixed income markets?

With slowing global growth and corporate earnings under pressure, we have increased allocation towards investment grade which typically offers a defensive carry of around 5%. Consequently, we have been reducing our high yield allocation, with our exposures focused on issuers with stable business models and healthy liquidity profiles.

Given the inverted yield curves where 2–3 year rates are higher than 10 year rates, we believe that the short-dated segment offers the most attractive risk-reward, as the carry earned compensates investors for the downside risks and volatility in the market.

Our investment grade exposure is anchored by high quality financials, which we believe are likely to benefit from rising interest income and strong capital positions. Leading issuers within Industrials and TMT (Technology, media and telecommunications) also currently offer attractive coupon carry which can potentially cushion against rate volatility over the medium term.

As for high yield, we are staying cautious as idiosyncratic risks are high, but we do see opportunities beyond China high yield property, such as TMT and infrastructure assets with more resilient business models and steady cash flows.

What to expect in Asia credit moving forward?

China credit remains the talk of the town and whether this segment is a value play or value trap continues to be hotly debated. While sentiment towards China is negative and investor positioning light, we wouldn’t write the entire market off and would argue that attractive opportunities do exist.

China high grade credits are looking cheap relative to history and global credit, and it is not difficult to find bonds with 5-6% yields amongst higher quality state-owned enterprise (SOEs) and TMT issuers. Besides, this also comes with the potential of further outperformance should the Chinese economic recovery gain stronger footing or if the zero-covid policy is moderated.

China high yield property, however, has been the hardest hit this year and continues to face a highly challenging environment. Against liquidity stresses and weak contracted sales, earnings visibility remains low and refinancing in the public bond market challenging. We thus remain skeptical of the recent bounce in selected Chinese property developers. Identifying survivors via careful bottom-up credit selection has been critical in helping us avoid the defaulted names and will continue to be so going forward.