High quality Asia bonds will likely continue to attract yield seekers amid uncertain markets. The hard currency investment grade (IG) segment, which makes up nearly 80% of the market, offers distinct advantages compared to developed market peers, making these bonds compelling diversifiers in global portfolios.1
Given recent bond market volatility, how do you expect Asia IG bonds to perform in the months to come?
Lau: We believe conditions remain ripe for Asia IG's continued strong performance this year with the region's economies poised to progressively open up. Asia IG bonds have been insulated from recent credit scares, and we are expecting a greater dispersion of returns within the IG space. One obvious example is the divergence between the Chinese real estate issuers and the rest of the Asian segments, which so far have been almost entirely spared from spread widening. We expect the epicenter of weakness from the Chinese real estate market to remain in the high yield segment, although some volatility may radiate to weaker Chinese real estate investment grade names.
Asia Credit Spreads Still Have Room for Compression
Source: JPM, Bloomberg, PineBridge Investments as of 30 September 2021. Asia IG Credit Spread represented by JPM JACI Investment Grade Index. For illustrative purposes only. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. We are not soliciting or recommending any action based on this material. Past performance is not indicative of future results.
Slim: Broadly speaking, credit metrics in Asia, such as corporate net leverage have remained relatively low compared to US, Latin America, and other emerging markets, while interest coverage ranked highest relative to these three regions.2 That, along with a stable Asian institutional investor base should anchor credit spreads.
What benefits can Asia IG bonds offer a global portfolio?
Lau: Asia IG offers better yield than investment grade bonds in other regions, while duration is shorter,3 offering a buffer against rising interest rates. In terms of diversification, Asia IG offers a higher Sharpe ratio4 than US bonds, US inflation-linked, and global equities. It also offers exposure to China and the rising economies of South and Southeast Asia that still remain underrepresented in global bond indexes. A stable regional institutional investor base could potentially dampen volatility.
Asia IG Still Offers Higher Yield With Shorter Duration Than Peers
Source: Bloomberg, PineBridge Investments as of 30 September 2021. Asian IG is represented by JACI Investment Grade, US IG by the Bloomberg Barclays US Credit Index and Global Agg Credit IG: Bloomberg Barclays Global Aggregate Index. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Past performance is not indicative of future results.
Asia IG Bonds Offer Better Risk-Adjusted Returns Than Other Major Asset Classes5
Source: Bloomberg, rolling five-year data as of 30 September 2021. *Sharpe ratio is the most common measure for calculating risk-adjusted return for a fund. Diversification does not insure against market loss. For illustrative purposes only. There is no assurance that the investment strategies and processes mentioned herein will be effective under all market conditions. Investors should evaluate their ability to invest for a long-term based on their individual risk profile, especially during periods of downturn in the market. Past performance is not indicative of future results.
How are you positioned in the Asia IG market?
Slim: Our positioning reflects our expectation of more return dispersion in the next few quarters. This is reflective of a few investment themes dominating the Asia credit market, the most important of which is an evolving Chinese policy environment. China is the largest component of the Asia credit market and is expected to continue to grow in market share. As such, Chinese developments have wide-ranging ramifications for the overall market. In 2021, Chinese policy makers clearly signaled that sovereign support will be, at the very least, less forthcoming and any policy support will be highly targeted. This is a theme that we think is not fully priced in yet. It drives our more cautious positioning within the Chinese space, consistent with our investment process that simultaneously analyzes fundamentals, valuations, and technical factors. Our positioning also integrates our environmental, social and governance (ESG) views, which are an essential part of our selection process.
This post is funded by Pinebridge Investments
1 JPMorgan, 30 September 2021.
2 BAML, PineBridge Investments as of 30 June 2021.
3 Duration measures how much bond prices are likely to change when interest rates change. It is a gauge of interest rate risk and is expressed in years. The shorter the duration, the less sensitive a bond's price is to interest rate changes.
4 Sharpe ratio is the most common measure for calculating risk-adjusted return for a fund. The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of risk (volatility). The higher the Sharpe ratio, the better the returns compared to the risk taken.
5In this chart, commodities are represented by the Bloomberg Commodity Index, Asia USD Bonds by the JPM JACI index, Emerging Markets (USD) by the JPM EMBI Global Diversified index, US IG Credit by Bloomberg Barclays US Aggregate Index, US High Yield by Bloomberg Barclays US High Yield index, US Inflation Linked by Bloomberg Barclays US Inflation Linked index, US Equities by S&P 500 index, and Asia ex Japan Equities by the MSCI MXASJ index.
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