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Capital IdeasTM

Investment insights from Capital Group

Categories
Fixed Income
Asian fixed income: Careful navigation required
Koon Chow
Investment Analyst
Debbie Leow
Fixed Income Investment Analyst
November 16, 2022
KEY TAKEAWAYS
  • The implications of inflation, monetary policy and geopolitical risk for Asian fixed income call for careful navigation.
  • While caution is required, Asia’s large and diverse investment universe offers opportunities for yield pick-up over US Treasuries.
  • In Asian offshore credit, fundamentals in investment grade corporates have been relatively strong, but remain challenged among high yield issuers.
  • China’s property crisis has impacted both sentiment and technical factors, but reduced dominance of the sector will be healthier for Asian high yield credit in the long-term.

Fixed income investors have been subject to turbulent markets over the course of 2022.  We have drawn on the strength of Capital Group’s fixed income team to explain how Asian fixed income markets have fared amid current heightened volatility.  Fixed income investment analysts Koon Chow and Debbie Leow share their perspectives on the region and where they are finding investment opportunities.


Koon Chow


Caution warranted on Asia sovereigns, but pockets of opportunity exist


I am cautious on the Asian sovereign outlook due to tightening global financial conditions, weaker Chinese growth and rising regional inflation. Asian sovereign bonds are perhaps more resilient against these waves than many other regions due to the large pool of domestic savings and investors in Asia. However, these strengths are already reflected in the price of many bonds.


Nevertheless, Asia is a diverse investment universe and while I am cautious on sovereign bonds, there are some opportunities to highlight.


Renminbi-denominated government bonds in China could still provide ballast for portfolios targeting yields. These bonds are anchored by easier monetary policy and demand from domestic savers. These bonds are likely to continue to be stable and uncorrelated to global rates trends until the Chinese economy rebounds.


Pockets of value are also emerging in select sovereign bond markets. Yields on Indonesian sovereign and quasi sovereign dollar bonds have increased more than US Treasuries over the year to date. Spreads have started to move above the historical averages in spite of the improving growth and fiscal backdrop. For example, 10-year Indonesian dollar bond offers a yield pick-up of between 150-300bps over US Treasuries1, which is beginning to appear attractive for a stable BBB issuer. Similarly, yield spreads of Korean quasi sovereign dollar bonds over US Treasuries are at multiyear wides at around 150bps on 10-year, for example, which I consider attractive for an AA issuer.1


Cautious on Asian sovereign credit, but a diverse landscape presents select opportunities

Asian Sovereign

Past results are not a guarantee of future results.
As at 21 October 2022. Sources: WIND, JP Morgan, Bloomberg, Capital Group. Indices used for developing Asia government bonds: JP Morgan EMBI Global Diversified Index; US investment grade corporate bonds (1-10-year): Bloomberg US Intermediate Corporate Bond Index; global government bonds:

Inflation, monetary policy and geopolitical risk require careful navigation


Inflation is increasingly a challenge in Asia (ex. China) with high global commodity prices dovetailing with weaker currencies and supply bottlenecks. To some degree Asian inflation is lagging the inflation trends of Europe and the US and, consequently, is likely to peak later.


Monetary policy and conditions have started to tighten but my concern is that we still have some way to go. My view is that we are probably only around a third to halfway through the hiking cycle and this creates more of a challenge for Asian local currency bonds than for sovereign dollar bonds.


Geopolitical risks are also a key consideration. The war in Europe and the spill-over impact on oil prices, in addition to potentially weaker future demand for Asian exports from the region present a persistent worry. There is very little clarity on whether the worst is over and whether it is priced-in to markets. Strained relations between US and China are a persistent challenge to capital flows, technological development and economic growth. A de-escalation of this tension seems unlikely ahead of US elections in 2024.


In light of the tensions, some Asian economies have tried to position themselves as an alternative to the China-centric supply chain. From this perspective Vietnam, Indonesia, Thailand, India and Malaysia could benefit from more foreign direct investment and trade, with positive macro implications for sovereign credit fundamentals.


1. As at 21 October. Sources: Bloomberg, Capital Group


 


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Koon Chow is a fixed income investment analyst at Capital Group with research responsibility for China and emerging Asian sovereigns focusing on both eurobond and local currency instruments. He holds a master's degree in economics for development from Oxford University and a bachelor's degree in economics from Cambridge University. Koon is based in Singapore.

Debbie Leow is a fixed income investment analyst at Capital Group with research responsibility for Asian non-financials credit. She has 15 years of investment industry experience and has been with Capital Group for four years. She holds a bachelor's degree in economics from the London School of Economics and Political Science. She also holds the Chartered Financial Analyst® designation. Debbie is based in Singapore.

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