Year Ahead 2025: Asian Credit
Asia credit all-in yields remain at multi-year highs, with expectations that spreads should stay relatively stable in 2025, bolstered by favourable market conditions. We briefly explore what we believe could be the key drivers for Asian credit in 2025 and where we see the most compelling investment opportunities.
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Asian Credit in a nutshell in 2024
Asian credit enjoyed strong performance in 2024, notably outperforming US and global counterparts (Fig. 1). However, investors have been wary on re-entering the asset class for a few reasons. While Mainland China’s growth remains challenged, and further complicated by the prospect of a Trump 2.0 era, policymakers’ focus on supportive measures announced since late September marks a pivotal change in the nation’s policy direction.
Figure 1: Asia credit has outperformed other fixed income asset classes YTD, both investment grade and high yield
Source: Schroders, BRS Aladdin, Bloomberg, as of 18 November 2024. Indices used: JP Morgan Asia Credit Index Corporate, ICE BofA Global Corporate Index, ICE BofA US Corporate Index, ICE BofA Euro Corporate Index, ICE BofA US Mortgage Backed Securities Index, ICE BofA Global High Yield Index, ICE BofA US High Yield Index, ICE BofA Euro High Yield Index. Past performance is not a guide to future performance and may not be repeated. YTD 2024 returns for Asia IG Corp, Asia HY Corp ex China HY Property, and China HY Ppty based on JPM country breakdown. For illustrative purposes only and does not constitute to any recommendations to invest in the above-mentioned security/sector/country.
What do we see are the key potential drivers of Asia credit markets in 2025?
While spreads are tight in Asia, the same is observable worldwide. However, the positive is that Asia’s all-in yields remain at multi-year highs, with expectations that spreads should stay relatively stable in 2025, bolstered by favourable market conditions.
There are a few key reasons why Asia credit markets are potentially attractive in 2025:
- Firstly, Asia Pacific is forecasted to remain the global growth engine1, boding well for credit fundamentals and driving a moderation of defaults. Compared to emerging markets, Asia offers more high-quality opportunities thanks to its large developed market universe, and improved macro environments of the region’s middle income countries2. Relatively deleveraged balance sheets and conservative growth ambitions of Asian corporates further underpin credit fundamentals.
Secondly, technicals remain strong amid negative net supply and robust in-region demand. Demand for Asia credit may be further fuelled by anticipated US dollar strength and as investors seek attractive yields in dollar asset classes.In 2025, carry will likely remain the name of the game as compelling Asia credit yields (JPM Asia Credit Index YTM 6.2%3) are expected to stay high for longer. Tight spreads warrant careful credit selection with an emphasis on issuers with solid fundamentals and adaptive business models. Overall, we anchor our portfolios with compelling high-quality carry, while seeking interesting idiosyncratic stories within high yield. We favour segments such as Australia and Japan financials in investment grade, and India renewables and Macau gaming in high yield. Considering increasing corporate governance risks, prudent position sizing and selective involvement in new issues are critical.
In 2025, carry will likely remain the name of the game as compelling Asia credit yields (JPM Asia Credit Index YTM 6.2%3) are expected to stay high for longer. Tight spreads warrant careful credit selection with an emphasis on issuers with solid fundamentals and adaptive business models. Overall, we anchor our portfolios with compelling high-quality carry, while seeking interesting idiosyncratic stories within high yield. We favour segments such as Australia and Japan financials in investment grade, and India renewables and Macau gaming in high yield. Considering increasing corporate governance risks, prudent position sizing and selective involvement in new issues are critical.
Finally on rates, we see most value in the shorter part of the curve. Amid persistent rate volatility, we prefer to keep duration neutral to a small overweight, while staying nimble. Positively, Asia credit benefits from a shorter duration profile relative to most regions (Fig. 2), providing resilience against rate fluctuations especially considering unpredictable Trump policies and resultant reflation concerns.
Figure 2: Duration profiles of Asia vs other regions
Source: Bloomberg, BofA indices, as of 2 December 2024.
What should Asian credit investors stay watchful of in 2025?
There are a number of potentially market impacting events in 2025, including various policies under a Trump administration, China’s stimulus plans, and further geopolitical tensions.
- The key implications of a Trump win for Asia are twofold: 1) tariffs and growth, and 2) USD rates and USD trajectory. Considering potentially higher trade friction and uncertainty globally, domestically oriented markets or issuers are likely to remain resilient. These include selected names in India, Indonesia, Australia, and Japan. Additionally, financials, a key overweight within our credit strategies, are anticipated to potentially thrive under a more pro-growth and reflationary US environment given expanding interest margins. Conversely, we remain light on sectors burdened by overcapacity, such as automotives, Korean batteries, industrials and petrochemicals.
In Mainland China, the surprising policy pivot in September and Trump’s presidential victory have amplified hopes for stronger measures to stabilise the Chinese economy. In our view, patience is of the essence as a lot remains to be seen with regards to US policy and its impact on China or, more broadly Asia. We expected incremental supportive measures to be released at subsequent meetings as the situation unfolds.
On China credit, selectivity will be key considering rising credit differentiation and potentially slower growth in 2025. We stay cautious on the property sector, and issuers as increased sanction or tariff risk in a Trump era, particularly within state-owned enterprises, technology, media and telecom (TMT) sector. Despite this, many China credits may be more resilient versus Trump 1.0 given cleaner positioning and better business models or supply chain preparedness. Thus, while our focus remains on sectors of strategic importance and those that are less impacted by geopolitical tensions, such as selected internet platforms, technology and consumer names, we continue to keep a look out for alpha opportunities and market dislocations.
Overall, we see a compelling case for investors to relook Asian credit, considering stable fundamentals, supportive technicals and attractive all-in yields that well compensate for potential volatility ahead. For investors with existing allocation to global credit, Asia credit offers potentially attractive diversification benefits which can further enhance the risk-return potential of a broader investment portfolio.
Footnotes
1) In 2024, Asia is expected to generate c.60% of global growth, exceeding its share in global GDP of c.40%. Source: International Monetary Fund (IMF) Economic Growth Outlook, as of 24 October 2024.
2) Within the Emerging Markets Corporate index (CEMBI Broad Diversified), Asia ranks as the highest quality region at an average credit rating of BBB+. Furthermore, 11 out of the 16 markets in the JPM Asia Credit Index have an IG sovereign rating. Source: JP Morgan, as of 27 November 2024.
3) As of 25 November 2024, JPM Asia Credit Index (JACI) yield to maturity is 6.2%, while the investment grade and high yield sub-indices yield 5.4% and 10.1% respectively.
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