03 August 2020

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Asian Fixed Income Mid-Year Update: Navigating Opportunities in an Uneven Recovery

Strong credit fundamentals and favorable technicals built over recent years have helped Asian fixed income mitigate the sudden shock from the Covid-19 pandemic in the first quarter. Asian US dollar bonds have not only withstood the worst of the Covid-19 volatility but have come out as compelling as ever, demonstrating yet again its resiliency in the face of severe market stress.

As the largest economy and issuer in Asia, China anchors the risk sentiment for the region and the asset class. Emerging from the lockdown faster than other major economies, China’s recovery injected a dose of optimism into the market. The J.P. Morgan Asia Credit Index posted positive returns by early June, reversing from -3.6% in the first quarter.1

Fears of a sharp increase in corporate defaults have eased as production and business activities returned to normal following the shutdowns in January and February. Despite a GDP contraction in the first quarter, China is forecast to grow in 2020.

The speed and size of fiscal and monetary easing across the region and the decisiveness of governments, particularly in North Asia, in containing the virus also played an important role in reining in a deeper crisis. Some Asian governments still have room to exercise additional fiscal (rather than monetary) supportive measures should the outlook deteriorate in the short term.

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Asian Bonds Offer Better Yields, Lower Duration

Source: Bloomberg, PineBridge Investments, as of 29 June 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

Two, credit fundamentals are stronger than other regions. As the chart below shows, net leverage is second lowest versus other regions, and interest coverage has been steadily improving and now the second highest.

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"Asia Credit Metrics Remain Steady - Comparison of Corporate Net Leverage (x)"/>

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"Asia Credit Metrics Remain Steady - Comparison of Interest Coverage (x)"/>

Source: BAML, PineBridge Investments. Data as of 31 December 2019. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

Three, technicals remain supportive — demand is largely stable, anchored by a growing Asian institutional investor base and supported by liquidity from global and regional monetary easing, which has led to a recent uptick in foreign investor inflows. Supply remains healthy — new issuances have picked up since April after a brief pause in March with over half of total supply coming from China.3 Overall, we expect gross supply this year to be flat compared to last year.

Four, while the default rate is expected to edge up as more vulnerable sectors face credit downgrade pressures, our and the market’s forecast default rate for Asian high yield remains well below that of US, European, and global high yield.

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Asia's Corporate Default Rate Is Expected to Remain Low

Source: Moody’s, PineBridge Investments, as of 31 March 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any opinions, forecasts and forward-looking statements presented above are valid only as of the date indicated and are subject to change. *APAC = Asia Pacific. Past performance, or any prediction, projection or forecast, is not indicative of future performance.

To its advantage, the Asian bond market has a strong core in the more financially stable investment grade bonds, which make up approximately 80% of the market.4 We estimate the “fallen angel” risk for this segment at a benign 4%, with some pressure on Indian and Macau issuers. Macau’s gaming companies are weighed down by the collapse in tourism, while Moody’s recently downgraded India’s sovereign rating.

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1 As of 5 June 2020.
2 Source: Bloomberg, PineBridge Investments, as of 29 June 2020.
3 Source: J.P. Morgan, as of 8 June 2020.
4 Source: J.P. Morgan, as of 31 March 2020.
J.P. Morgan, as of 31 December 2019.


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