Asia credit investors diversify
Fund managers focused on Asian US dollar credit are adjusting their investment criteria as traditional issuance dries up and local currencies look increasingly attractive.
Overall G3 bond issuance from Asia excluding Japan and Australasia fell to US$197.4bn in 2024 from US$351.3bn in 2019, according to LSEG data, meaning that in some years redemptions have outweighed new issues, sending spreads tighter.
“US dollar bond supply outside Korea and financial issuers has been sporadic,” said Zerlina Zeng, head of Asia strategy and head of East Asia corporates at CreditSights. “The Asia ex-Japan space is shrinking and fund managers are looking beyond the region.”
Chinese issuers accounted for 48.7% of G3 bond issuance from the region in 2019, but that had dropped to 33.3% in 2024.
“As regional liquidity has ramped up and investor sophistication has increased, Asian investors have increasingly shifted from Asia-only (or mainly) mandates to a broader investable universe,” said Carla Goudge, head of debt syndicate for Asia Pacific at HSBC. “We now see Asian investors getting involved in transactions from a wide range of global jurisdictions and increasing number of local currency markets.”
In 2023, JP Morgan reflected the reduction in US dollar issuance from China by introducing a new Asia Pacific credit index which added hard currency bonds from Australia, Japan and New Zealand. China’s weighting of 40.4% in the JP Morgan Asia Credit Index at the time was reduced to 28.6% in the JACI Asia Pacific Index, with Japan and Australia accounting for around 20% and 10%, respectively.
Rong Ren Goh, portfolio manager for fixed income at Eastspring Investments, the asset management business of Prudential, noted that the increase in issuance from Australia and Japan in US dollars has included corporates from the insurance, infrastructure, utilities and construction sectors, helping investors diversify away from the bank issuers that make up a large part of the Asian credit universe.
Not all investors have been convinced by proposals to add developed market credits to funds that were previously focused on emerging markets.
“We considered tilting towards Japan, Australia and New Zealand,” said Alan Siow, co-head of emerging market corporate debt at Ninety One, an Anglo-South African investment manager with US$168.8bn of assets under management. “We initiated conversations with investors, and the end investor is not convinced by that proposal.”
Instead, Ninety One is currently underweight China credit and overweight India, particularly in renewables, Indonesia, especially rare earth and battery materials producers, and Malaysia and Macau, where there have been opportunities in gaming companies.
“We still believe in the China story but had to address the concentration issue,” said Siow.
“Indonesia and the Philippines are regionally attractive but on a global relative value basis are quite expensive,” he said. “You can often get a higher-rated Middle East issuer that pays a higher spread.”
Swapping currencies
Some other fund managers have looked to add other currencies to funds that used to focus almost entirely on US dollar bonds.
“If you swap euros into US dollars, the pickup is about 2.5% on that cross-currency, so we have looked to exploit that arbitrage for issuers in the JACI index,” said Stephen Gough, Singapore-based head of Asia credit at BlackRock, the world's largest asset manager.
Having adopted US dollar bonds from Australia earlier, BlackRock broadened its investment to Australian dollar bonds in the past 18 months.
“Swapping that back into US dollars using forwards gives a yield pickup of about 80bp right now,” said Gough. “That’s a decent pickup and brings some portfolio diversification benefits. We have also been looking to put some funds into the securitisation market in RMBS and some credit card ABS. You can get Triple A spreads of around 100bp–120bp, then when you add 80bp on top you get much higher yields than you do for some Single A issuers.”
Gough said US dollar bonds from Japanese financial companies and life insurers offer good pickups, but in the past three months BlackRock has been buying some yen bonds, which give an extra 4.2% pickup when swapped back to dollars.
“In recent years, we have identified cross-currency opportunities in fixed income investments within Asia,” said Goh at Eastspring, which fully hedges investments in bonds denominated in Asian currencies back into US dollars using FX derivatives.
“This strategy allows us to achieve net yields in excess of 50bp–100bp over and above comparable USD bonds,” he said. “In some instances, the volatility profile of these bonds would be even lower than that of USD bonds, making their volatility-adjusted return profile even more compelling.” Eastspring is generally more constructive on duration for non-US dollar bonds.
Key markets that Eastspring has invested in include Singapore dollar and Australian dollar credits.
Some local currency bonds not only offer yield advantages but also provide stability because they have a low correlation to the US dollar bond market.
“Singapore dollar bonds have a decent cross-currency swap pickup of 2.7%,” said Gough. “They are a useful source of income and diversification, and they didn’t react the same way as other spreads during the ‘Liberation Day’ unwinding.”
BlackRock has also been looking at the offshore renminbi market, where the 2.8% pickup after swapping back to dollars gives yields at or above some highly rated three-year Asian investment-grade bonds.
As the line between public and private markets has blurred, and the Asian high-yield market, traditionally dominated by Chinese property companies, has shrunk, BlackRock has even added some private credit to its funds.
“We have been able to provide opportunities to existing companies at different parts of the capital structure without taking on much extra risk, and with a 200bp–400bp pickup,” said Gough, noting that this kind of paper has turned out to be more liquid in the secondary market than initially expected.
“We have also moved into convertible bonds selectively,” he said. “When they lose all of their delta and become a pure credit play, they get kicked out of their indices and lose some attention, but then you can buy them at 75–80 cents in the dollar often for sound credit stories.”
Retooling challenges
While the parameters of many funds may give managers the freedom to switch investments to different geographies and currencies, smaller funds may struggle to adapt.
Ninety One’s Siow said many fund managers focused on Asia and global emerging markets had such a heavy focus on Chinese US dollar credit that the change in market dynamics has presented challenges for their existing operations.
“People had to retool,” said Siow. “If you built your business facing the rising sun in China, you have to reconsider whether you have recruited the right people for the shifting market. It’s very unlikely you will find someone who is both a China expert and an India expert.
“Senior investors who built their expertise in one market are seeking to apply that to another market. If you go on LinkedIn, suddenly everyone is an ASEAN expert.”