Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Asian fixed income investments saw respectable gains in 2023, despite global macroeconomic challenges. Asia local currency bonds rose 6%, and the JP Morgan Asia Credit Index increased 7%.
“In our view, Asia fixed income is strongly positioned for this year,” opines Jenny Zeng, Chief Investment Officer (CIO), Asia Fixed Income at Allianz Global Investors, in a recent market insight. “From a macro perspective, Asian economies’ growth outlook is more resilient than for developed markets, thanks to a tech cycle rebound and selective fiscal support led by China and Thailand.”
The six major elections in Asia will likely carry forward the primary narrative due to seamless transitions and continuity of major policies in countries like Indonesia and India. Zeng mentioned that for China, enhanced policy support, encompassing fiscal and monetary measures, is anticipated to establish a baseline for growth. She also expressed the belief that investors could overlook the adverse news concerning the property sector as it seeks a balance.
The asset manager’s positive outlook for Asia’s fixed income this year revolves around several key themes.
Firstly, Allianz GI is upbeat about Asia’s favourable growth and inflation dynamics. According to the asset manager, cyclical growth is likely to see an uptick among the electronics exporters, whereas the structural tailwinds from electronics supply chain diversification would consistently support the fixed capital formation in ASEAN countries. “Investment growth is expected to remain a key growth driver for India and the Philippines, while election-related spending and post-election investments will support Indonesia’s growth for 2024,” Zeng highlighted.
Besides, the asset manager believes that considering the trade linkages, Asia will likely reap the advantages of the spillover effects of China’s consumption-related investment growth, thus extending its cyclical rebound in manufacturing.
Meanwhile, Allianz GI’s CIO, Asia Fixed Income, stated, “Disinflationary trends in Asia should continue into 2024, though at a slower pace due to less favourable base effects on energy and food prices as well as subsidies rollback.”
Zeng foresees Asian central banks easing their monetary policies less than their peers in developed markets due to more robust growth. “As a result, Asian bond yields should look high relative to developed market bonds, which could drive capital inflows for Asian local currency bonds,” she argues.
Another theme that the asset manager highlights is the “sweet spot” of the credit cycle in Asia or the recovery stage. This usually features companies with the right-sized businesses, improving margins and decreasing leverage. “We see sectors such as Macau gaming, Indonesia industrials, China manufacturing and India infrastructure as being in this sweet spot currently,” says Zeng. She also recommends Indian utilities and Indian cyclicals, as the industries are in expansionary stage.
Speaking about China, Zeng believes that the worst is almost behind it. She feels that the focus should be more on China real estate’s “survivors” that have emerged from the worst credit downcycle in the sector’s history. Zeng further believes that China’s default cycle is ending, reinforced by an evident shift in property policy to tackle the liquidity crunch in the market.
That said, Zeng informed that the physical property market would take 3-5 years to reach equilibrium sales. The asset manager wants credit investors to know that the default rate should drop significantly from the level the market has experienced over the past three years. “In our view, this makes China high yield bonds more likely to realise the double-digit yields they currently offer,” opined Zeng.
The last theme that Allianz GI talks about in the insight is the impact of China’s changing growth model on its fixed income market. The asset manager expects China to shun its debt-reliant model to the “high quality” multi-faceted growth model.
The CIO of Asia Fixed Income predicted, “In credit, we think bottom-up fundamental credit selection will be key for alpha generation, particularly given significant market dislocation.”
“We think China investment grade will continue to deliver low volatility and decent carry in 2024, thanks to solid corporate fundamentals and strong technical support. But it is in China high yield where we see the biggest alpha opportunities,” Zeng added.
