Asia credit spreads are wide, while U.S. credit spreads are narrow. What accounts for this difference?
In response to the global financial crisis of 2008, the U.S. Federal Reserve and European Central Bank launched massive quantitative easing (QE) that has lasted for the better part of a decade. This artificially inflated money supply continues to distort credit spreads for U.S. and European high yield debt, making it harder for investors to earn attractive returns in these asset classes. In contrast, Asia's central banks largely avoided QE, allowing credit spreads to be shaped by market forces. Across Asia today, credit spreads for corporate bonds look rewarding for long-term investors.
What factors contribute to the stability of Asia's credit markets?
Asia's credit markets benefit from several layers of stability at the country level that are often lacking in other parts of emerging markets. Macroeconomic factors providing a tailwind for Asian corporate bonds include political stability, economic strength, reasonably balanced current accounts, low debt-to-GDP ratios, strong FX reserves and central bank independence. Macroeconomic risks remain, of course, and market conditions can change quickly, particularly in emerging markets. As active managers, we seek to identify and manage these macro risks through our fundamental, proprietary research process.
Why consider Asia corporate bonds as an alternative to EM debt or U.S. and European high yield?
For investors looking for diversification, Asia corporate bonds offer three key advantages: higher return potential, lower historic volatility and access to highly creditworthy issuers within emerging markets. Since the inception of the J.P. Morgan Asia Credit Index in 1999, Asia high yield bonds, represented by the high-yield portion of that benchmark, have consistently outperformed U.S. high yield and European high yield for investors with a time horizon of three years or longer, with lower volatility. (See Figure 1).
What do wide credit spreads in Asia suggest about investing at this point in the cycle?
Wide credit spreads make this an attractive time to invest in Asia high yield (see Figure 2). Investors have historically been rewarded over the long term for investing at this point in the cycle. Looking at the 20-year period ending December 31, 2018, when entering Asia high yield at the spread levels we see today, investors have historically achieved a positive return over any two- to three-year holding period. Even with a one-year holding period, 90% of the cases showed a positive return.1 Though the past does not always spell the future, it does make us more optimistic about future Asia high yield returns.
