fixed income
Asian credit: a structurally growing asset class
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.
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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 trillion2 today. 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
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
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
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.
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