The case for Asia fixed income

We meet with Tina Yu, Head of Fixed Income Asia for Discretionary Portfolio Management at Pictet Wealth Management, to get her take on the outlook for Asia fixed income.

How is Asia positioned when it comes to fixed income?

Asia is in a unique position. Compared to its American and European counterparts, Asia does not face the same inflationary challenges to its economy. Central banks in Asia did not have to hike rates as much and the drag on domestic demand from monetary tightening is less intense in region.

As a result, economic growth is holding up well in most Asian countries. 

Similarly, Asia credit has offered an attractive risk-return profile with lower volatility: There is defensiveness and stability in Asia investment-grade credits.

Should investors turn to investment-grade credits then?

While bond markets are volatile to further rate hikes from major central banks against a backdrop of tight labor markets and hawkish policy biases, we believe Asia investment-grade credits are well positioned to cope with the macro challenges ahead. Even with the rise in yields, the overall Asia credit market has had positive returns.

With nearly half of investment-grade credits being linked to their governments, or national champions, and with relatively strong fundamentals, we expect most of the issuers to keep their ratings intact in the near term.

Even in an unlikely scenario of systemic issuers facing credit issues, the intrinsic support from the governments should also lend support in the event individual ratings start to slip.

How does China’s economy play into this?

Specifically for China, the re-opening play and economic momentum has waned off as activity data for July has come below market consensus. The property sector has also made headlines again with lower sales numbers and with issuers facing liquidity issues.

We believe more support is needed to restore confidence in the property sector and broader economy.

For investors, active management is especially important in the Asia credit space where the market is ever changing, and investors need to act quick to capture opportunities and manage the risks.

Investors should keep an ever-watchful eye on the market.

Are Asian credits a good diversifier in a global portfolio?

The market is diversified and broken-up broadly across different countries like Japan, Australia, China, South Korea, India, Indonesia and Singapore, to name a few.

From a fundamental standpoint, most Asian economies have seen a steady improvement in their rating profile. Issuers also have stable credit matrices like 2.5x Net Debt or EBITDA and approximately 30% Cash-to-Total Debt ratio.

From a technical standpoint, outflows have stabilised in 2023 and the annual new supply has been lower. In addition, it has a unique investor base as 50–70% of the new issue subscriptions have been met by stable demand from domestic Asian investors.

All of this provides a unique asset allocation to Asian credit opportunities within a global portfolio while providing an attractive stable income.