investment viewpoints
Asian credit: emergence of a new asset class
CIO, Asia Fixed Income and Equities
Credit Strategist & Client Portfolio Manager
Asia has undergone tremendous structural reform in the past decades. Beyond export-oriented growth, the region has seen increased economic diversification, greater government transparency and deepening capital markets.
As a result, opportunities are multiplying in corporate bonds as Asian borrowers increasingly tap into the international, USD-denominated debt markets.
We believe global credit investors should build a dedicated allocation to Asian credit1 based on the prospect of funding the growth and expansion of companies in the world’s fastest-growing region. Our unconstrained approach aims to construct more diversified and attractive portfolios.
Five ways Asian credit shows promise
The nominal amount of Asian credit denominated in hard currency has grown from USD 250 billion in 2007 to more than USD 1.2 trillion in 20192. This significant growth has meant the Asian component of the market comprises more than 50% of the emerging market (EM), USD-denominated credit universe3 presently.
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2. Asian creditworthiness has improved relative to other emerging markets
The average credit quality of Asian borrowers is investment grade on a market cap basis, compared to other major EM markets (such as Latin America and CEEMEA) which have slipped into high yield. The divergence stems from the high average rating of USD-denominated debt issued by Asian borrowers compared to the lower (and typically deteriorating) rating quality of other EM credit markets4. This ratings evolution has resulted in a rise in Asia’s share of overall EM investment grade issuance.
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3. There is an increasingly diverse issuer base
Such is the economic growth and development of the region, new issuers have come to the market in sectors which did not exist as recently as 5 or 10 years ago. In our view, Asian hard currency credit offers large cap and diverse sector exposure not similarly present in the wider EM credit universe and Asia local currency bonds. Amongst others, these include leading firms in i) renewable energy, ii) technology and iii) real estate.
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4. Leverage metrics are positive and default rates are low
Asian borrowers are less aggressive than other EM credits in terms of leverage, and leverage ratios have been declining since 20135. During this period, Asian corporates have generally prioritised profitable growth over debt-funded expansion. Even amid tighter liquidity conditions in EM since 2013, Asian governments and corporates have prepared accordingly and maintained stable and relatively low leverage. Corporate default rates in Asia are low at 2.2%, especially when compared to other regions. Historical default rates in Asia have also been lower than in Latin America during times of market stress6.
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5. Demand for Asian credit is homegrown
Domestic investors own a large and increasing share of the Asian USD debt market. The allocation of new Asian USD issues in primary markets to Asian investors has been gradually increasing and is now over 80%7. That makes Asian credit much less prone to “hot money” flows from international investors, thereby diminishing the market’s vulnerability to external factors.
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Many possibilities shine brightly in Asian credit, in our opinion.
Please find key terms in the glossary.
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sources.
1 The term ‘Asian credit’ refers to debt issued by Asian borrowers in hard currency.
2 Source: JP Morgan as of August 2019.
3 Source: JP Morgan as of August 2019.
4 Source: JP Morgan JACI constituents as of 30 August 2019.
5 Net leverage refers to net debt/EBITDA ratio. Source: JP Morgan, Bloomberg, Capital Q. Refers to data incorporating Q1 2019 earnings.
6 Source: JP Morgan. As at January 2019. According to JP Morgan the default rate (ex 100% quasis) in 2013 was 1.2% for Asia and 10.6% for Latin America. In 2016, the default rate was 1% for Asia and 9.2% for Latin America.
7 Source: Bond Radar, Bloomberg, J.P Morgan estimates. As of August 2019.
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