Arthur Lau, Pinebridge Investments
Despite a volatile year, default rates of Asian credit are expected to fall to single digits in 2022 from double digits this year, said the US asset manager.
“An economic slowdown and ongoing policy reforms may pose risks while also creating opportunities, as potential policy easing and supportive measures may reverse the current defensive sentiment,” said Arthur Lau, co-head of emerging markets fixed income and head of Asia ex Japan fixed income.
“At the same time, policy reforms will likely benefit sectors whose activities are aligned with the central government’s agenda.”
In general, he believes the fundamentals of the Asian credit market are steady and improving, with a few sectors in exception.
This should offer a strong foundation for the region’s fixed income market in a potentially choppy, policy-driven 2022, said Lau.
Coupled with higher yields of up to 10.5% and shorter duration of 2.8 years, Asian high yield bonds are attractive compared with their American peers, he said.
Pinebridge expects the Chinese property sector will remain under pressure as concerns about the sector’s liquidity and refinancing risks intensify in the near term, but the government has adequate tools to contain any risk from this sector.
He believes it is not yet the time to buy single-B Chinese property names, but selectively purchasing BB-grade Chinese property bonds would generate an attractive return in 2022.
Apart from Chinese high yield credits, Pinebridge likes the commodity sector due to its credit buffer from the surge in commodity prices. The asset manager believes Asian commodities will be a more stable, lower-beta sector compared with Chinese real estate.
Risks
For investment grade bonds, Lau thinks that current credit spreads look reasonable compared with historical averages.
Although market volatility will ease over the next year, Lau expects US interest rates will be the major source of risk in 2022 and investors should stay away from prospective downgraders.
Potential headwinds for 2022 could include the rising inflationary pressure in the west, the economic slowdown in China, and return to widespread Covid-19 lockdowns.
However, Lau believes the inflationary risk is transitory, although investors should be cautious of potential interest rate shocks if inflation becomes more entrenched.
