investment viewpoints

    Asian credit: a structurally growing asset class

    Asian credit: a structurally growing asset class
    Asia Fixed Income team -

    Asia Fixed Income team

    This paper focuses on the structural factors driving the growth of Asian credit, and is the first in a five-part series. Look out for future insights exploring the diversification benefits of investing in this asset class.

     

    Need to know:

    • Over the past decade Asian credit1 has emerged as a distinct, trillion-dollar asset class within the global credit universe.
    • We believe Asian investment-grade credit offers a series of advantages which make it a unique opportunity for global investors in higher quality credit.
    • Key benefits of this asset class include a preponderance of investment-grade ratings, increasing debt issuance size and a favourable demand structure.

     

    A predominantly investment-grade market

    We highlighted Asian credit as an opportunity for global credit investors back in September 2019, in our paper Asian credit: emergence of a new asset class. Since then, global demand for dedicated Asian investment-grade (IG) credit allocations has continued to rise. This, coupled with growing structural demand from the local Asian investor base makes the demand picture highly supportive of the asset class.

    Over the last 10 years, the Asian credit market has experienced stellar growth, from USD 300 million in 2011 to USD 1.5 trilliontoday. A defining feature of Asian credit is that it is predominantly an IG market, with the Asian credit market comprised of 72% IG credit on a market-cap basis.3 The credit quality profile of Asian IG therefore ranks higher than other major global emerging markets (EM), where the IG universe on both sovereign and corporate levels has been shrinking over the past decade after notable sovereign downgrades into high yield. This is further brought to the fore by Russia's recent debt default and removal from EM IG indices.

     

    FIG. 1 Market capitalisation for Asian IG credit and comparable assets

    Asia Credit #1 - FIG 1 - Mkt cap-01.svg

    Source: LOIM, ICE BAML indices, JP Morgan Indices. As at April 2022. “EM IG Corp” includes Asia. For illustrative purposes only.

     

    FIG 2. Asian credit is predominantly an IG asset class

    Asia Credit #1 - FIG 2 - IG class-01.svg

    Source: LOIM, JP Morgan indices. As at 8 April 2022. Above charts reflect the hard currency credit market in each region. HY includes non-rated.

     

    A diverse and deep market

    The Asian IG credit market offers diversity and depth across a broad range of countries and sectors with ample trading liquidity. Consider the following characteristics:

    • The median deal size has increased from only USD 30m in 2011 to USD 500m today;
    • Approximately 67% of deals issued in the Asia Pacific USD market are greater than USD 500m in size, with around 29% between USD 1 billion and USD 3bn;
    • Large jumbo issuers have also entered the market, with issue sizes above USD 3bn, including large IG financials across China, India and Indonesia;
    • There is a significant quasi-sovereign segment of the market, which is unique to Asia; this includes much of the China state-owned enterprise (SOE) space, Indian issuers such as development banks and large state-owned infrastructure conglomerates, and a wide range of Indonesian state-owned IG issuers;
    • The wider Asia Pacific universe includes a liquid pool of large, US-dollar denominated non-benchmark IG issuances from Japan and Australia, including high-quality large-cap companies, particularly in the financial sector.

     

    FIG 3. Average and median issue sizes for Asian credit have increased significantly in the past 10 years

    Asia Credit #1 - FIG 3 - Issue sizes-01.svg

    Source: LOIM, Bloomberg. Includes bonds issued across the Asia Pacific region denominated in US dollars. As at April 2022.

     

    Local demand underpins the market

    A key feature of the Asian credit market is that it benefits from a strong demand structure. The bedrock of demand is a diverse local investor base, which includes pension funds, commercial banks, China onshore investors, private banks, and insurance asset managers. Demand from developed North Asian countries such as Taiwan is particularly strong, with allocations to overseas fixed income estimated to account for around 60% of portfolios.4

    Broadly speaking, Asia is home to countries with high savings rates, which in turn are supported by current account surpluses and large economies. This provides a strong base for investable assets that are deployed into Asian credit markets. The low interest rate environment in many domestic local currency markets has increased the need for greater diversification into hard currency debt as well.

     

    Increasing foreign participation

    Alongside local demand, there is also increasing appetite from global investors keen to benefit from Asian credit’s unique profile. Asian credit markets have attracted global capital for many years and we believe this trend will continue going forward. Amid the search for yield over the past decade, investors have started to diversify IG credit allocations beyond core DMs into EMs. For instance, new issue allocations to US and European investors for Asia IG primary deals increased from 22% in 2016 to 35% in H1 2021.

    For global investors in USD-denominated IG, Asian IG is a natural companion to US IG for instance, given that the Asian IG market is a USD hard currency asset class. Over the past decade, Asian IG has provided more than double the spread for every duration year invested in US IG5.

     

    To read the full report, please use the download button provided.

     

     

    Sources

    1 This insight uses the term “Asian credit” to refer to debt issued by Asian borrowers in hard currency.
    2 As of 31 May 2021. Source: JP Morgan indices.
    3 On an index basis (JP Morgan JACI), the proportion of IG is 83% as at April 2022. Hard currency credit only. Does not include local currency debt stock.
    4 Source: JP Morgan Research, July 2021.
    5 Source: LOIM, Bloomberg. As of 22 April 2022.

    important information.

    For professional investor use only.
    This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
    Lombard Odier Investment Managers (“LOIM”) is a trade name. This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
    Any benchmarks/indices cited herein are provided for information purposes only. No benchmark/index is directly comparable to the investment objectives, strategy or universe of a fund. The performance of a benchmark shall not be indicative of past or future performance of any fund. It should not be assumed that the relevant fund will invest in any specific securities that comprise any index, nor should it be understood to mean that there is a correlation between such fund’s returns and any index returns.
    Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
    Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
    Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
    No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited which is authorized and regulated by the FCA.
    ©2022 Lombard Odier IM. All rights reserved.