Crouching Tiger, Hidden Yield

Opportunities in Asian Credit for Insurers

09 September 2021

4 min read

Arnaud F. Mounier| Managing Director and Global Co-Head—Fixed Income Business Development

For insurers, the quest for yield battles daily against the need for high-quality investments. Many investors have exhausted the usual yield sources. It’s time to look deeper.

US and European investment-grade credit offer quality, but yields are meager. Some investors have explored broad emerging-market (EM) debt, which often meets yield and quality criteria. However, EM debt brings other risks, including rising US rates, slow vaccination rates, a stronger than expected US dollar and specific country risks.

For insurers with narrow risk constraints, the secondary concerns in broad EM debt may be a bridge too far. But there’s another option.

Asian Credit Has Historically Had Less Volatile Returns

We believe insurers should consider the opportunities in Asian credit. Over the last ten years, the sector has had an attractive risk-adjusted return profile (Display).

Asian Credit Offers an Attractive Return/Risk Profile

Scatter plot of Asia Credit versus other credit asset classes shows it to have lower volatility and similar returns

Current analysis and forecasts do not guarantee future results.
As of March 31, 2021
*US dollar hedged
Source: Bloomberg, Haver Analytics and AllianceBernstein (AB)

Asian credit offers competitive yields with lower volatility than broad EM categories—a boon for investors concerned with downside risk. The category’s lower volatility should also be attractive for insurers looking to avoid significant downdrafts, which could cause impairment charges. While Asian investment-grade bonds have slightly lower average historical returns than peers in developed and EM sectors, they have the highest risk-adjusted returns, thanks to their lower volatility. All this gives Asian credit investors a less volatile performance path, particularly in down markets, another plus for insurers looking to maintain solvency levels above regulators’ expectations (Display).

Asian Credit Provides a Less Volatile Ride

A 10 year line graph compares EM Asia to EM Europe, EM Latin America and EM Corp. EM Asia is less volatile.

Historical and current analyses do not guarantee future results.
As of June 30, 2021
Source: Bloomberg and J.P. Morgan CEMBI

Surprisingly, this lower volatility doesn’t carry a high price tag. Over the last ten years, Asian investment-grade credit spreads were higher than US and European credits and recently were more than 50 basis points greater (Display).

Asian Credit Spreads Trend Wider than US, Europe

A 10-year plot of credit spreads for the US, Europe, Emerging Markets and Asia. Only Emerging Markets are wider than Asia.

[Placeholder for disclosures, if there’s any.]
As of ______
Source: _______

Three Reasons Asian Credit Deserves Consideration

There are three main reasons Asian is particularly interesting now. First, most large institutional investors are more familiar with the US and European markets, so there are fewer eyes on emerging markets in general, let alone Asian credit. That’s why, as countries recovered from pandemic lockdowns and hedging costs fell, Japanese insurers deployed cash but skipped over Asian credit to invest heavily in lower-yielding, but more familiar, US investment-grade credit.

Second, Asian credit is less affected by central bank bond purchase programs than are developed markets. Because asset purchases were deployed by many countries in this region for the first time in the wake of the COVID-19 shock, and experts are still debating the success of those moves, yields for Asian credit likely won’t be driven lower by government purchases or impacted by US tapering.

Lastly, and significantly, fundamentals in Asia are generally improving. The region has thus far benefited from the first-in, first-out phenomenon regarding COVID-19. Insurers should note that bond ratings for the area, typically a lagging indicator of economic health, are showing substantial improvement.

Assessing Credit Risk in China

While Asian credit fundamentals are generally attractive, the recent crackdown on technology and education companies by the Chinese government is a reminder of how important it is for investors to understand what matters to the Chinese government and how that may influence markets.

At the same time, the Chinese credit market is evolving. With China allowing weak companies that aren’t systemically important to default, creditors can price credit risks more accurately. And Chinese companies with stable cash flows, low regulatory risks and sound business practices are now more likely to be rewarded as they would be elsewhere in the world.

With a market cap of over US$1 trillion, the Asian credit market has reached a size and capacity that can absorb significant flows and provide adequate diversification opportunities. That’s why we believe that insurers looking for yield but sensitive to downside risk should explore the benefits of Asian credit.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Arnaud F. Mounier

Arnaud Mounier is the Global Co-Head of Fixed Income Business Development. He relocated from Hong Kong, where he was head of Fixed Income Business Development for APAC, to Europe in 2022. Prior to joining the firm in 2015, Mounier was regional chief investment officer for AXA insurance companies across Asia ex Japan from 2009 to 2015, and director for structured credit at Crédit Agricole CIB in Hong Kong from 2007 to 2009. He started his career in 1999 at AXA Investment Managers Paris, where he held a variety of roles, including quantitative fixed-income analyst, high-yield portfolio manager and senior credit structurer. Mounier holds an MS in applied mathematics from École Nationale Supérieure d'Informatique et de Mathématiques Appliquées de Grenoble.

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Crouching Tiger, Hidden Yield

Opportunities in Asian Credit for Insurers

Asian Credit Has Historically Had Less Volatile Returns

Three Reasons Asian Credit Deserves Consideration

Assessing Credit Risk in China

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