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.
