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5 reasons to invest in Asian credit

27 März 2018

 Carl Wong Carl Wong is a Vice President, Senior Portfolio Manager of Nexus Investment Advisors Ltd since 2015 and co-manager of the RAM Asia Bond Total Return Fund.

By Carl Wong, Fund Manager of RAM Asia Bond Total Return Strategies

 

 

  • The rapid expansion of the Asian hard currency bond market makes it a visible asset class for global asset allocators
  • The structure of this asset class’ buyers makes it less vulnerable to global selloffs
  • Asian hard currency credit offers attractive yields in respect to credit/interest rate risks
  • The Asian default rate has been largely better than the EM average
  • Asian countries present today better fundamentals than other Emerging Markets

Asian hard currency credit posted solid performances with limited downside during market stress periods over the last years, becoming an appealing area to invest in. Considering the JP Morgan Asia Credit Index TR USD (JACI), the market has been experiencing an impressive 6-fold growth since 2008. In terms of sectors, the Asian market is a highly diversified universe: the JACI Index includes 14 sectors, with the largest ones being Financials and Quasi-Sovereign and Sovereign bonds, and 17 countries.

 

5 reason to invest in Asian credit

Source: JP Morgan, 31 Dec 2017

The importance of local investors into Asian hard currency credit as a whole has grown significantly since 2010, if we look at the allocation of new issuance by region (figure 1), we can see that in 2010 local demand for Asian credit new issuances accounted for about 50% of the global number, while at the end of 2017 this percentage changed significantly: over 70% of the demand last year came from Asian investors. A feature that makes this universe completely unique compared to other emerging market regions is the fact that Asian investors tend to be very devoted to local bonds: private banks clients in particular generally buy and hold local bonds until maturity. This special and unique characteristic of the Asian bond market has helped increasing the market stability and its resilience to potential external shocks.

The importance of local investors into Asian hard currency credit as a whole has grown significantly since 2010, if we look at the allocation of new issuance by region (figure 1), we can see that in 2010 local demand for Asian credit new issuances accounted for about 50% of the global number, while at the end of 2017 this percentage changed significantly: over 70% of the demand last year came from Asian investors. A feature that makes this universe completely unique compared to other emerging market regions is the fact that Asian investors tend to be very devoted to local bonds: private banks clients in particular generally buy and hold local bonds until maturity. This special and unique characteristic of the Asian bond market has helped increasing the market stability and its resilience to potential external shocks.

Asian markets have proved their strength even in terms of default rate. The Asian default rate has been largely better than the EM average over the past 9 years, with 2017 data showing a 0,9% default rate in Asia compared to a 3,1% in EMEA countries, 2% in Latin American countries and 3,2% in Middle East and North Africa (MENA). Additionally, due to favorable financing conditions in 2017, many Asian issuers were able to roll their debt to longer maturity and secure cheaper funding. Amid this background, we believe Asian hard currency credit has become an established asset class, which offers a good balance between yield and credit/duration risk compared to other emerging markets regions and developed markets. Additionally, the so-called “Asian premium”, due to investors’ perception for the region’s credit risk, presents an attractive yield uptick for European investors. The performances of this asset class have also remained relatively stable during different macro-economic environments, and this represents another positive feature for global investors. Last but not least, fundamentals: Asian countries present better fundamentals than other emerging markets peers and continue to implement structural reforms that should lead to medium term economic and financial improvements.

Currently, we adopt a selective approach for Chinese banks, favoring larger names at the expense of SME banks. Also, the expected improvement of competitiveness in Chinese State-owned Enterprises (SOE) supports a positive outlook for this segment. We have a positive stance on Indonesian Sovereign & Quasi Sovereign bonds, in light of the improving fiscal deficit and the higher commodity prices, two elements which remain a positive tailwind for the country. Indian credit is offering interesting opportunities, with an investment grade space dominated by SOE, we prefer corporates to banks. Finally, the dissipation of the North Korea geopolitical risk should prove positive for Korean Sovereign bonds and investment grade bonds, where spreads should test the tightest levels.

 

 

Nexus Investment Advisors Limited, subject to the supervision of the Securities and Futures Commission (SFC) in Hong Kong, has been appointed by the fund's management company as investment manager to RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund.

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