27 March 2018
5 reasons to invest in Asian credit
By Ani Deshmukh, Fund Manager of RAM Asia Bond Total Return Strategies
- The rapid expansion of the Asian hard currency bond market makes it a visible asset class for global asset allocators
- The structure of this asset class’ buyers makes it less vulnerable to global selloffs than in the past
- Asian hard currency credit offers attractive yields in respect to credit/interest rate risks
- The Asian default rates over the past years have been largely better than the EM average
- Asian countries present today better fundamentals than other Emerging Markets
Asian hard currency credit posted solid performances with limited downside during market stress periods over the past years, becoming an appealing area to invest in. Considering the JP Morgan Asia Credit Index TR USD (JACI), the market has been experiencing an impressive 6-fold growth since 2008 (from $141 billion to over $900 billion currently). In terms of sector, the Asian market is a highly diversified universe: the JACI Index includes 14 sectors, with the largest ones being Financials and Quasi-Sovereign and Sovereign bonds, and 17 countries.
Source: JP Morgan, 31.12.2018
The importance of local investors into Asian hard currency credit as a whole has grown significantly since 2010, if we look at the allocation of new issuances by region (figure 1), we can observe that in 2010 local demand for Asian credit new issuances accounted for about 50% of the global number, while at the end of 2018 this percentage significantly changed: 76% of the demand came from Asian investors last year. A feature that makes this universe completely unique compared to other emerging market regions is the fact that Asian investors tend to be very devoted to local bonds: private banks’ clients in particular generally buy and hold local bonds until maturity. This special and unique characteristic of the Asian bond market has helped increasing the market stability and its resilience to potential external shocks.
Asian markets have proved their strength even in terms of default rate. The Asian default rates have been largely better than other EM regions considering the average levels over the last decade. Additionally, due to favorable financing conditions, many Asian issuers were able to roll their debt to longer maturity and secure cheaper funding. Amid this background, we believe Asian hard currency credit has become an established asset class, which offers a good balance between yield and credit/duration risk compared to other emerging markets regions. Additionally, the so-called “Asian premium”, due to investors’ perception for the region’s credit risk, presents an attractive yield uptick for European investors. The performances of this asset class have also remained relatively stable during different macro-economic environments, and this represents another positive feature for global investors. Last but not least, fundamentals: Asian countries present better fundamentals than other emerging markets peers and continue to implement structural reforms that should lead to medium term economic and financial improvements.
Nexus Investment Advisors Limited, subject to the supervision of the Securities and Futures Commission (SFC) in Hong Kong, has been appointed by the fund's management company as investment manager to RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund.
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