Stay Invested, Asian Bonds Outshine US Peers

Asian High-Yield bonds will likely fare well this year
China is undergoing structural transformation; technology, media and telecommunications Investment-Grade bonds in focus

Asian Investment-Grade and High-Yield bonds exhibit sound fundamentals and compelling yields. Asia's inflation levels are relatively well-managed. As Asian firms face lower financing costs, default risk in High-Yield bonds is relatively low, lending support to the asset class. High-Yield bonds can expect a better performance this year, synergising with their Investment-Grade counterparts. From a multi-asset perspective, our investment teams hold a bearish stance towards cash.

Asian Investment-Grade bond yields appealing; Chinese TMT offers yield pick-up, South Korean & Indonesian fundamentals intact

When comparing Asian Investment-Grade bonds to their US peers, the effective yield for Asian bonds was 5.2% surpassing that of the US' 4.5%. Duration of Asia bonds was notably shorter at 5.1 years, versus the US duration of 6.5 years.

In Asia, Investment-Grade bonds from China, South Korea and Indonesia offer enticing yields and solid fundamentals. Particularly, Chinese technology, media and telecommunications (TMT) related Investment-Grade bonds are favoured due to lower regulatory risk and reasonable valuations. Spreads between A and BBB rated Investment-Grade bonds remain attractive, with the potential for further narrowing. Credit fundamentals of high-beta state-owned bonds are showing signs of improvement. Limited supply has led to strong investor demand for 30-year bonds, which are particularly favoured by our investment teams. USD-denominated Chinese Investment-Grade bonds will also find support from supply shortages and mounting demand due to their alluring yields compared to their onshore counterparts.

Our investment teams maintain a positive outlook on South Korean Investment-Grade bonds, with a preference towards the financial sector, notably securities, insurance subordinated bonds and AT1 bonds. These sectors offer superior opportunities compared to bonds with similar ratings due to their attractive valuations.

Indonesian quasi-sovereign bonds, including government-backed power and commodities firms, present another intriguing opportunity within the Investment-Grade bond market. Indonesia is on solid macro grounds, with GDP growing 5% last year. A stable rates outlook coupled with a favourable demographic profile, the nation is positioned for sustained structural growth. Technical fundamentals are equally compelling. Relative to sovereign bonds, spreads of quasi-sovereign bonds have room to narrow further, offering valuable long-term investment prospects. This underpins our preference for Indonesian quasi-sovereign bonds over sovereign ones. Given the limited supply, our teams are particularly drawn to the 30-year ultra-long space.

Asian High-Yield credits: exceptional quality, India and Indonesia preferred

Attractive yields, short duration and manageable default risks are some exceptional attributes we can find in Asian High-Yield credits. As opposed to the US, heightened rates have sent borrowing costs higher for many corporates, elevating default risks. Consequently, our investment teams perceive the allure of US High-Yield credits pale in comparison against their Asian peers, within which we particularly favour India and Indonesia.

Indian High-Yield bonds span an array of sectors, including airport, steel and renewable energy. Earnings are poised for growth at India's two major airports, which have experienced consistent increase in passenger traffic and improving leverage ratios. Renewable energy is another area where we hold a constructive stance. The sector's resilience is contributed by its easy access to onshore financing and strong government support. Turning to Indonesia, many companies can efficiently manage their debts by tapping onshore funding. Among all areas, we prefer Indonesian High-Yield property bonds, given developers' access to diverse financing channels and attractive valuations. In addition, to shore up the country's economy, the government has waived the 11% value-added tax on properties valued below 2 billion Indonesian Rupiah until a certain date, and a 50% reduction beyond that.

On the other hand, China's property market remains in doldrums in February, but some private developers alleviated pressures by either divesting assets or obtaining financing through bank loans using investment properties as collaterals. This encouraging trend has prompted our teams to seek tactical opportunities among private developers with low short-term default risks.

Conclusion

Many Asian countries concluded their rate cut cycles long ago. In contrast to the US, borrowing costs for Asian companies remain relatively low. Paired with intact fundamentals and enticing yields, Asian High-Yield bonds are believed to bode well this year, complementing Investment-Grade bonds. Investors who stay invested and nimble can capitalize on the benefits arising from the expected shift in monetary policy.