Three reasons why Asian investment grade is instrumental in fending off global volatility

Global markets had been on a roller coaster ride in the first quarter. Economic data showed the US is highly likely to enter a mild recession. Regardless of the Fed's next move, BEA Union Investment believes the end is in sight for US rate-hike cycle, however, we expect the Fed to hold rates higher for longer before a change of direction. US banks have maintained the tightening lending to manage the headwind of US and Europe banking issues. On the contrary, Asia is getting a powerful boost from China's reopening.

Market variables and tapering rate hikes have paved the way for investment grade bonds. Following major changes in market conditions in the first quarter, high-yield strategy has become more cautious. At the same time, the advantage of investment grades - the ability to play offensive and defensive, was accentuated. Below are three reasons why:

1. Asian banks and corporate investment grade fundamentals remain stable

Some Asian investment-grade bonds are backed by sovereign, quasi-sovereign or stronger leaders. Asian banks and corporate investment-grade bonds enjoy solid fundamentals, while trading at attractive valuations versus their US and European peers. European and US investment grades five-year Sharpe ratio were in negative territory, whereas Asia's remains positive, meaning with the same risk level, returns offered by Asian investment-grade bonds are more compelling. In times of market uncertainties, Asian investment grades are more defensive given its ability to diversify returns via rates and credit spread.

2. Low inflationary pressure positive for bonds

Asia faces relatively lower inflationary pressure, suggesting the region could likely end its rate hike cycle earlier than developed countries. South Korea, Indonesia and India, for instance, have already stopped raising rates further and may even be able to cut rates. On average, distribution yield of Asian investment grade was nearly 5%. When rates plateau or trend lower, Asian investment-grade bonds of good quality and outlook could provide stability to the overall portfolio while offering appealing income and capital appreciation potential. When markets steadies, new issuance will resume, sustaining market momentum.

3. Asian economy sees powerful growth driver

How China's economic recovery boosts growth prospects has been well covered by now. Among them is how the country's reopening can stimulate consumption and propel growth within the region, including Thailand, Malaysia and Philippines. Indonesia and India continued to post positive economic growth. In March, Indonesia's PMI was 51.9. In the same month, the country recorded trade surplus of US$2.91 billion, a surplus of 35 months in a row. India also posted favourable PMI in March, which expanded from February, thanks to growing productivity and new orders. After China lifted travel restrictions, Macau's tourism and gaming recovery gathered pace, with gross gaming revenue surging 247% to US$1.58 billion in March from a year earlier. Asian's rosy economic conditions will provide the region a buffer to defend itself from a deteriorating external environment. This sets a favourable backdrop to invest for the long run.

Asian bond already had its fair share of volatility last year. As the region's fundamentals improve, more opportunities will emerge across investment-grade bonds, which will enhance return while fending off external volatility.