Posted inFixed Income

Asian credit to reward investors for rest of 2023

Schroders sees the region’s growth outlook and other tailwinds as key drivers for Asian credit as an attractive asset class.
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The relatively robust returns from Asian credit so far this year are likely to continue in the coming months due to the region’s strong growth outlook.

The IMF’s projection in April that Asia Pacific would contribute about 70% of overall global growth for 2023 provides a stable environment for companies and banks to operate in, according to Peng Fong Ng, head of credit for Schroders in Asia.

In particular, he expects Indian and Indonesian companies to perform well, amid ongoing divergence in performance across the region.

Notably, with tighter financial conditions set to last for longer, high-grade companies with strong balance sheets and good liquidity will likely continue to outperform high yield issuers, as they did in the first half of 2023.

“Asian credit is predominantly an investment-grade credit universe and it offers investors stable quality income generation with an attractive risk-adjusted return profile,” added Ng.

He believes investors are also being paid to wait for the interest rate cycle to turn. “When that happens, there is also scope for price appreciation and capital gains.”

China sees new support

Investors should also not give up hope on mainland China, despite disappointment with the momentum of the domestic growth recovery this year.

For example, Hilda Cheong, Schroders’ investment director for fixed income, believes the latest July Politburo meeting shows awareness at the highest levels about the need to ease real estate restrictions and ensure the sector has an orderly recovery.

At the same time, there are support measures for local government financing vehicles and new economy sectors.

“We believe sectors that could benefit from the consumption trend and the new economy trends in mainland China will continue to perform well,” said Cheong, highlighting autos, tourism and Macau gaming.

Schroders favours high-quality issuers in these sectors, where many companies have been reporting strong results and recovering cash flows.

Regional opportunities emerging

Elsewhere in Asia, the UK fund house believes that now is a good time to lock in long-term income from high-quality credit at attractive valuations.

For instance, short-dated credit offers around 6% yield in US dollar terms, from between one to three years of high-quality credit.

In terms of sectors, the firm is most positive about financials and insurance, particularly in the subordinated debt part of the market. “We also like sectors where companies can generate strong defensive cash flows, such as utilities and renewable infrastructure,” said Cheong.

By geography, Korea is also appealing, with attractive all-in yields and credit spreads, especially via new issuances, she added.

Part of the Mark Allen Group.