Asian credit valuations: mind the gap

investment viewpoints

Asian credit valuations: mind the gap

Dhiraj Bajaj - Head of Asia Fixed Income

Dhiraj Bajaj

Head of Asia Fixed Income
Tobias Bracey - Credit Strategist & Client Portfolio Manager

Tobias Bracey

Credit Strategist & Client Portfolio Manager

Currently, Asian USD credit offers valuation advantages compared to other major bond markets in the world, in our opinion.

While Asian USD credit markets experienced total returns in the double digit area over 2019, this was from a relatively low base at the beginning of the year when credit markets traded at very depressed levels. Although credit spreads are tighter in January 2020 compared to the beginning of 2018, we believe both investment grade (IG) and high yield (HY) markets could still offer benefits.

 

Asian IG: structural advantages

The Asian IG market has a lower average duration on an index level compared to the US and even Latin America, as shown in Figures 1 and 2.  

 

Figure 1: Asian IG has higher average rating versus US and LATAM IG with a lower duration

  Asia IG LATAM IG US IG
  YTW 3.00% 3.95%

2.74%

  Spread 123bps 201bps

100bps

  Duration 4.48 years 7.66 years

7.69 years

  Average rating A3/A- Baa2/BBB A3/A-
 
Source: Bank of America Merrill Lynch and JP Morgan indices, Lombard Odier. Based on CEMBI Broad sub-indices. As at 21 January 2020. YTW refers to yield-to-worst. Yields are subject to change and can vary over time. Past performance is not a guarantee of future results.

 

Figure 2: Asian IG all-in yields offer value on a duration-adjusted basis

Asian IG all-in yields.jpg (Print)

Source: Lombard Odier calculations. Bank of America Merrill Lynch and JP Morgan Index data. All index yields adjusted to a 6 year duration. As at 21 January 2020. Yields are subject to change and can vary over time. Past performance is not a guarantee of future results.

 

Asian HY: attractive relative value

Asian HY credit still appears cheap compared to other markets, as illustrated below. Asian HY offers improved valuation relative to both US HY as well as LATAM HY, for instance, making it the cheapest major USD-denominated HY market at present.

 

Figure 3: Asia HY trading wider than LATAM and US HY

  Asia HY LATAM HY US HY
  YTW 6.26% 5.88%

5.18%

  Spread 458 410

358

  Duration 2.97 2.78

3.23

  Average rating Ba3/BB- Ba3/BB- B1/B+
 
Source: Bank of America Merrill Lynch and JP Morgan indices, Lombard Odier. Based on CEMBI Broad sub-indices. As at 21 January 2020. Yields are subject to change and can vary over time. Past performance is not a guarantee of future results.
 
 

Figure 4: Asian HY vs US HY valuation gap widened in 2019

 

US HY vs Asia HY.jpg (Swiss Franc appreciation_EN-V2)

Source: Bloomberg, JP Morgan Indices, Lombard Odier. 22 January 2020. Yields are subject to change and can vary over time. Past performance is not a guarantee of future results.

 

In BB ratings, Asian credit could offer a spread pickup of 139bps vs US HY (ex-quasi government bonds) and 109bps vs LATAM HY. In the single B space, Asian USD credit could offer a notable 332bps wider credit spread compared to US HY and 282bps vs LATAM HY. Please refer to Figure 5 below. 

We note that this wider spread in Asia comes despite the fact that Asian credit markets are deeper than LATAM markets, Asian HY companies tend to be larger in size than LATAM HY, and the Asian HY default rate has been lower historically.

We believe that investors could benefit from taking advantage of the valuation gap offered by Asian credit.

 

Figure 5: Asian HY spread wider than LATAM HY for comparable ratings

 

Spread
(basis points)

Spread to US HY
(basis points)

Overall

425 9

     ex. quasis1

463 47

      BB

296 60

      B

509 99
Asia 468 52

      BB

369 134

      BB ex. quasis

374

139
      B 743 333

      B ex. quasis

742 332

Latin America

417 1
      BB 266 31

      BB ex. quasis

265 29
      B 443 33

      B ex. quasis

460 50

Source: JP Morgan, Lombard Odier. As at 13 January 2020. Yields are subject to change and can vary over time. Past performance is not a guarantee of future results.

 

sources.

1  Quasis refers to quasi-sovereign issuers

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