What should investors know about Asia credit?
- The US$1.2 trillion Asia credit market is a significant and growing part of the emerging market fixed income universe.
- With a low correlation to other major asset classes (developed and emerging) Asia credit brings valuable diversification benefits.
- It offers a rich hunting ground for active investors.
- Distinct characteristics and a differentiated risk/return profile means dedicated expertise is vital for capturing alpha and managing risk.
- Considering Asia credit through our compelling forces framework reveals a picture of fundamental strength at attractive risk-adjusted valuations with market price behaviour that is conducive to potential alpha capture for investors.
The dollar-denominated Asian corporate debt market has grown significantly in recent years. It’s now four-times the size of the European high-yield market and similar in magnitude to the entire emerging market hard currency sovereign bond universe.
For emerging market corporate debt investors, Asia is the largest region in the popular JP Morgan Corporate EMBI Broad Diversified (CEMBI) Index, accounting for 37% of the overall index. China has been a big driver of this growth but as other economies mature, we expect the diversity of the market to continue to rise.
We think Asia credit’s attributes extend far beyond its size and diversity, as Alan and Tom explain in a new paper. By analysing the investment universe through the lens of our compelling forces framework – covering fundamentals, valuations and market price behaviour, they conclude that Asia credit has much to offer investors.
The paper also points out that while Asia has enjoyed historical default rates that are among the lowest in the EM universe, the region has its fair share of highly leveraged corporate issuers in challenging sectors. Even as defaults remain rare, they can still occur, and the current macro backdrop further underscores the need for investors to be active, vigilant and discerning.
Investing in Asia credit requires the right expertise and a careful and selective approach, but we believe the potential rewards are worth the effort.
Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
Investments carry a risk of capital loss.