What is the allure of Asian investment-grade bonds?

  • Asia Investment Grade bonds have lower duration and less sensitive to interest rate movement
  • Asia countries have more optimistic growth prospects and  lower inflation pressure
  • Asia investment grade bonds opportunities are vastly diversified across countries and sectors

As interest rates peak, investors are shifting their focus towards investment-grade bonds. Among global fixed income, BEA Union Investment believes the outlook is optimistic for South Korea, Indonesia and China investment-grade notes within Asia.

How the current rate is moving enhances overall return

Markets expect the US is near the end of its rate hike cycle. Albeit inflation is still hovering far above the target of 2%, it recently  retreated to below the 5%-level for the first time in two years. But the economy will continue to be beleaguered by high prices for an extended period of time.  As recession looms, the risk-reward profile of equities will be less appealing. Conversely, investment-grade bond fundamentals are more resilient, offering bondholders the opportunities of profiting from higher yields at lower risks. What's more, bond prices often move inversely to interest rates. If the timing is right, investors can reap capital gains to bolster overall return.

The economic outlook of Europe and the US is still murky, with worries of the banking crisis rekindled still lurking around. In our recent commentary, Asia enjoys solid fundamentals with relatively low inflationary pressure. Also, Asia investment-grade bonds have lower duration than their peers, which are more defensive amid economic uncertainties. Under these circumstances, our investment teams believe Asian investment-grade notes fit the bill as an attractive asset class.

South Korean banks, Indonesian oil & commodities qualities favourable

In comparison to Europe and the US, pressure on prices is much weaker in Asia. Many Asian countries have already paused or slowed the pace of rate hike. In April, South Korea's inflation rose 3.7% year on year, the lowest rate in 14 months. Markets believe the country's current rate hike cycle has ended, with the possibility of rate cut in the second half. Hence, we are constructive on South Korean banks because of the sector's favourable profit outlook. The industry's regulatory framework is robust, and the financial system is sound and stable. Fitch Ratings expected South Korean banks have room to reprice loans upwards, benefiting the sector's development. In addition, ample domestic liquidity helps support margins and profitability, lowering the cost of funds and subsequently, enhancing risk management in face of economic headwinds. These attributes underpin the resilience of the country's banking sector. South Korea's investment-grade banks are trading at attractive valuations and are rated A or AA. The appealing risk-reward ratio is the reason why the teams see allure in the sector.

Indonesia annual consumer prices rose 4.33% in April, extending its downward momentum, and alleviating the country's need for further rate increase. Some investment-grade sovereign and quasi-sovereign credit spreads rangebound within tight levels. Peaking interest rates benefit oil and commodities segments. From a technical and fund flows perspective, the overall outlook remains steadily optimistic. Of late, a state-owned Indonesia geothermal power company issued new green bonds and priced at tight, underscoring strong investors demand towards energy assets, particularly renewable energy. This lent support to the local bond market.

Chinese investment-grade bonds outlook buoyant

Logistics, food delivery and technology, media and telecommunications (TMT) are sectors preferred by our teams. Economic rebound buoys retail sales recovery. Official data showed logistics and food delivery-related sectors stayed above the 50-level in April, suggesting activities are still in expansion mode. These bonds, which are rated BBB, have wide credit spreads and offer juicy yields. As for the TMT industry, we favour the industry for its robust fundamentals. There are also signs that the authorities are reversing their stringent regulatory stance towards the tech industry, paving way for a brighter corporate prospect. Recently, a Chinese internet giant announced the restructuring plan of splitting its company into six business groups that could independently seek individual listings. Our investment teams perceive the move as a sign of relaxation towards refinancing activities from the authorities, which is constructive for future growth.

When global economic growth tapers off, Asia is still marching on steadily. Nevertheless, Asian investment-grade bonds are vastly diversified across countries and sectors and investors should conduct thorough analyses to capitalise opportunities in a fast-evolving market. If investing across a diverse portfolio is what you have in mind, consider investing with a team of professionals who are experienced in managing the assets in a timely manner.

Asian Fixed Income Investment Series

Asian Strategic Bond Fund Asia Impact Bond Fund
Invest mainly in Asian Investment Grade Bonds, with flexible allocation to High Yield Bonds as strategy play, to seek stable dividend and capital appreciation opportunities.
Thematic strategy fuses with 'Green, Social and Sustainable' bonds, it leverages the advantages of quality bonds in Asia.