The outlook for Asian credit has rarely been brighter. The first quarter of 2017 was a record for international bond issues from Asia, beating the previous three-month record by 25%, and high-yield offerings are booming.
Supply and demand are nicely balanced: investors are hungry for assets, and issuers want to lock in long-term funding and sell riskier products while appetite is high and rates are low. Most market participants expect a fairly benign 2017, which will drive Asian new issues to new heights.
IFR Asia’s Outlook for Asian Credit roundtable, held in late February, offered a chance to test the sustainability of this consensus with a diverse mix of panellists from the buyside and sellside.
As ever, there are some risks on the horizon. While the panel was confident that Asian bonds would continue to perform well, the uncertain global backdrop loomed over the discussion.
Donald Trump’s election as US President has made market predictions especially challenging. On the one hand, his promises of infrastructure investment and tax reform would help the US drive global growth, with positive implications for Asia. But protectionist policies and anti-trade rhetoric are a threat to Asian exports, and the collapse of a healthcare reform bill in mid-March has raised questions over how many of Trump’s plans will make it through Congress.
Then there is the thorny issue of US interest rates. Few expect the US Federal Reserve to raise rates rapidly, and recent guidance from the policy committee has been comforting. That, however, raises the risk of a shock should events fail to live up to expectations. After an extended run of dollar borrowings from Asia’s emerging markets, any renewed capital flight brings with it high risks.
External risks are inherently unpredictable, but Asia can take comfort in the development of the regional investor base. Plenty of recent US dollar issues have been distributed entirely within Asia – often exclusively to buyers in Greater China – and regional bond funds are growing fast.
The depth of local liquidity pools was a hot topic at the roundtable discussion, and participants were keen to emphasise the stabilising influence of longer-term institutional investors such as pension funds and insurance companies.
Risks remain, of course, but the outlook for Asian credit is bright. Market participants will expect to make hay while the sun shines.
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