investment viewpoints
Asian credit valuations: mind the gap
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- |
Figure 2: Asian IG all-in yields offer value on a duration-adjusted basis
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+ |
Figure 4: Asian HY vs US HY valuation gap widened in 2019
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 |
Spread to US HY |
|
|
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.
important information.
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