Strong credit fundamentals and favourable technicals built over recent years have helped Asian fixed income mitigate the sudden shock from the Covid-19 pandemic. Asian US dollar bonds have not only withstood the worst of the Covid-19 volatility, but have also come out as compelling as ever, demonstrating yet again its resiliency in the face of severe market stress.

As the largest economy and issuer in Asia1, China anchors the risk sentiment for the region and the asset class. China’s recovery in the second quarter has injected a dose of optimism into the market.

The speed and size of fiscal and monetary easing across the region and the decisiveness of governments, particularly in North Asia, in containing the virus has been critical in reining in a deeper crisis. Some Asian governments still have room to exercise additional fiscal (rather than monetary) supportive measures should the outlook deteriorate in the short term.


Mr Arthur Lau, CFA, head of Asia ex Japan Fixed Income at PineBridge Investments. PHOTO: PINEBRIDGE INVESTMENTS

Mr Arthur Lau, head of Asia ex Japan Fixed Income at PineBridge Investments, shares his views on some of the factors that support Asian investment grade:

At PineBridge, we believe the resiliency of Asian bonds during the pandemic continues to support the case for a stand-alone allocation for investors seeking to expand their opportunity set beyond negative-yielding assets, as well as for those wanting to reposition for Asia’s recovery and long-term growth opportunities.

Highly diversified across sectors and markets, the high-quality Asian investment grade (IG) bond segment makes up approximately 80 per cent of the US$1 trillion Asian US dollar bond market.2

Four factors supporting Asian investment grade

We believe four key factors underpin the performance of the Asian IG bond market:

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1. Asian bonds offer better yields than US and global bonds of the same credit quality.

As the chart below shows, Asian IG, for instance, offers 81 bps higher than global IG and 46 bps over US IG. Durations are also lower, positioning the asset class as an attractive diversifier in a global portfolio.


Source: Bloomberg, PineBridge Investments, as of June 29, 2020. 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. *Yield is the return an investor would expect from the bond. **Duration represents the bond’s sensitivity to changes in interest rates.

2. Credit fundamentals have improved in recent years, bolstering issuers’ resiliency in this crisis.

As the chart below shows, Asian investment grade issuers entered the crisis on a stronger footing.


Source: Bloomberg, J.P. Morgan, as of June 30, 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material. *Interest coverage ratio represents the number of times the issuer’s earnings can cover interest payment. The higher the interest coverage ratio the stronger the issuer’s solvency. **Leverage ratio is measured by net debt/ earnings before interest, taxes, depreciation and amortization (EBITDA). The lower the ratio the higher the amount of income available to pay off debt.

3. Technicals remain supportive.

Demand is largely stable, anchored by a growing Asian institutional investor base and supported by liquidity from global and regional monetary easing, which has led to a recent uptick in foreign investor inflows.


Source: J.P. Morgan, PineBridge Investments as of June 30, 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

With net supply this year forecast to be only about half of last year’s, the supply/demand dynamics should be highly supportive of the market’s outlook.

4. Fallen angel risk remains benign at 4 per cent3, even as the default rate in Asian bonds is expected to edge up as more vulnerable sectors face credit downgrade pressures.

Uneven recovery, dispersed returns

Asia’s recovery is likely to be uneven across sectors and markets. Some headwinds linger — a few Asian countries are still racing to contain the virus and US-China tensions continue to simmer in the run-up to the US presidential election in November. This makes for an environment of highly dispersed returns suitable for active investors.

Supported by strong and persistent technical factors, as well as resilient fundamentals, the Asian IG continues to be a compelling investment, and we expect it will retain its status as a core fixed income holding. Our investment thesis favors greater issuer differentiation to find value opportunities in this market.

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For instance, among sovereign-linked issuers, understanding the differences of and extent of sovereign support for various entities is key. And in some markets, despite sovereign credit rating downgrade, opportunities persist in specific issuers in more resilient sectors.

Over the long run, multiyear credit trends such as China’s economic transformation and Asia’s continued economic rise should continue to drive performance.

Learn more about the Asian investment grade bond opportunity at www.pinebridge.com.sg.

Footnotes:
1 J.P. Morgan, as of June 30, 2020; World Bank data accessed August 31, 2020.
2 J.P. Morgan, as of June 30, 2020. Investment grade bonds are rated BBB or higher.
3 J.P. Morgan, as of June 2020.

Disclaimer:
All investments involve risk, including the loss of principal amount invested. Past performance is not indicative of future results. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk. Any views represent the opinion of the manager and are subject to change. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. We are not soliciting or recommending any action based on this material. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by the MAS. Investors should note that the website pinebridge.com.sg and any other website (including any contents therein) referred to in this document have not been reviewed or endorsed by the MAS.

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