The end of the first quarter of 2018 provided the ideal backdrop for a debate on the future of Asia’s credit markets. After a bumper year for Asian bonds in 2017, followed by the busiest January for international issuance on record, rising US Treasury yields and renewed diplomatic tensions have injected a note of uncertainty.
IFR Asia convened a panel of experts for a roundtable discussion in Hong Kong on March 16, bringing together credit and rates strategists as well as major institutional investors and investment bankers.
The event set out to answer one fundamental question: has Asian credit reached its peak?
Asia’s corporate and sovereign borrowers have enjoyed easy access to cheap, long-term funding in recent years, thanks to a combination of ultra-low international base rates and the rapid growth of Asia-focused investments. A furious rally in 2017 produced enviable returns for investors and sent credit spreads tumbling to multi-year lows. International bond sales from Asia hit an all-time high of over US$330bn, more than double 2013’s annual total for G3 currencies.
Further outperformance, however, is far from guaranteed. On one hand, Asia’s fundamentals remain attractive. The region’s major economies are all growing, and home-grown demand and consumption has become a major driver. Credit spreads have some room to tighten further before they test pre-2008 records. Refinancing, together with capital spending and corporate expansion, is driving issuance.
But the downside risks are mounting. Higher US interest rates threaten to suck capital away from emerging-market assets, and an unpredictable US president has raised fears of a global trade war. Volatility has returned to risk markets, and Chinese politicians have stirred concerns of private-sector intervention with the takeover of ambitious insurance company Anbang.
The arrival of major new institutional investors, mostly from China, has narrowed the gap between Asia and developed market prices, but this new demand has yet to be tested through a cycle. Will Chinese funds scale back their international fixed income allocations if the renminbi strengthens? Will China’s regulators close the borders?
The following transcript provides an in-depth debate of these questions, and more. While some panellists were noticeably more bearish than others, there was a firm consensus that the biggest risks facing Asian credit are lurking far outside the region. The direction of US monetary, trade and economic policy will be closely watched throughout the remainder of 2018 – and beyond.
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