Divergence opens up Investment Opportunities; Focus on Long-term Rate Trends and Flexibly Allocate Bond Investments

U.S. election may induce rate volatility; stay flexible between Asian investment-grade and high-yield bonds
Favour Chinese TMT, South Korean financial investment-grade bonds; compelling relative value
Positive on Chinese property, Indonesian property and industrial high-yield bonds, supported by spread compression

2024 is an election year. Countries and regions such as India, Indonesia have all held general elections, with the upcoming US presidential election looming around the corner. As elections coincide with escalating geopolitical tensions, BEA Union Investment teams believe rate volatility could intensify later in the year. Therefore, we will stay focused on long-term interest rate trends to steer clear of any short-term fluctuations. Economies of many Asian markets are on strong footing. Their bonds have sound credit fundamentals and appealing yields. For the rest of the year, we opt for flexibly seeking opportunities between Asian investment-grade and high-yield bonds by adapting to evolving market conditions.

Stay bullish on South Korean Investment-grade Bonds; China's TMT Long Duration Investment-grade Bonds Offer Compelling Investment Potential

South Korea's economy and financial markets remain stable. Investment-grade bonds issued by the country's financial institutions boast strong credit fundamentals and attractive yields, prompting us to favour credits from banks, brokerage, and leasing companies. The rebound in South Korea's domestic consumption and robust exports drove the nation's first-quarter GDP up by 1.3% from the previous quarter, beating market expectations and representing the biggest increase since the fourth quarter of 2021 . The South Korean central bank now predicts the economy could grow faster than its previous forecast of 2.1%. Meanwhile, inflation has been easing more rapidly than expected, with annual consumer prices rising by 2.7% in May, the smallest increase this year. Furthermore, South Korea's resilient financial market will likely allow the country to withstand risks arising from potential deterioration in external market conditions.

BEA Union Investment also sees compelling opportunities in China's TMT long duration bonds, particularly those issued by e-commerce and social platform operators. Latest results from Chinese tech giants have been notably impressive. That, alongside scant new issuance and attractive yields, investor appetite towards this space remains robust. Also due to supply shortage, bonds issued by China's asset management companies have also delivered robust performance. The sector is also a beneficiary of China's property support measures, which help improve investor sentiment.

Turn Slightly Positive on Chinese High-yield Property Bonds; Favour Indonesia's Property, Industrial High-yield Bonds

China has rolled out a spate of measures to prop up its economy and real estate market, and many cities nationwide have already lifted restrictions on home purchases. The authorities introduced additional initiatives in May. Among them, the PBoC announced a refinancing loan of RMB300 billion that aims at supporting local state-owned enterprises (SOEs) in purchasing unsold properties for conversion into affordable housing. At the same time, mortgage policies were adjusted by removing the floor for mortgage rates and reducing down payment ratios. We expect the government will monitor the effectiveness of these measures for a while and will only consider other means if the outcome falls short of expectation. Improvements in new home sales, property prices, and developers' profitability require time. But from a credit perspective, initiatives from banks, such as offering developers refinancing through project loans or guaranteed bonds with asset collateral, are shots in the arm for financially healthy developers. Beneficiaries of these property support measures include investment-grade developers, those with SOE or local State-owned Assets Supervision and Administration Commission (SASAC) parents, or developers possessing sufficient investment property assets for collateral.

To the same extent, we are focusing on Indonesia's property and industrial high-yield bonds. Indonesia posted a year-on-year first-quarter economic growth of 5.11% , exceeding market expectations. Thanks to a growing workforce and improving purchasing power, the country's economy possesses immense structural growth potential. Concurrently, the Indonesian government's commitment to infrastructure investment is expected to spur economic activities, driving the outlook for Indonesian industrial high-yield bonds. Market observers expect continuity in the nation's economic policies under the incoming new president. Indonesia, whose economy is the largest in Southeast Asia with rosy prospects, has been luring substantial foreign investments. Of late, a prominent US tech firm announced a US1.7 billion investment in Indonesia to develop AI and cloud technologies . Economic stability also buoys the country's housing market, which saw a rise in both home prices and sales in the first quarter, with sales surging by 31.16% from the year-earlier period . So far this year, many Indonesian companies have initiated early tender offers for their USD-denominated bonds or have undertaken debt restructuring to reduce interest expenses, thereby strengthening their balance sheets and credit fundamentals.

Conclusion

Economies of many Asian economies are on stable footing. Their bonds are supported by strong credit fundamentals and comparatively compelling yields versus global peers. However, Asian bonds will, to a certain degree, be affected by the performance of US bonds. The looming US presidential election may introduce market volatility. Thus, investors could capitalise on investment opportunities emerging from market movements by staying attuned to long-term rate trends and adopting a flexible approach in allocating between investment-grade and high-yield bonds.