- In this article, we highlight reasons to remain positive on Asian USD-denominated IG bonds.
- We believe macro tailwinds within Asia can provide support for Asian bonds in general, helped by a less aggressive monetary policy backdrop, and reopening across the region.
- We also see yields turning more attractive, with credit fundamentals remaining robust.
- Asian USD IG bonds can also complement your portfolio, especially with its shorter duration relative to global IG bonds.
- We recommend the United Asian Bond Fund, and believe its defensive positioning can help it to perform well in the years ahead.
It has been a tough year for investors, with year-to-date (YTD) declines in 2022 observed across asset classes. Despite the onslaught in fixed income markets, Asian USD-denominated investment-grade (IG) bonds (gauged by the Bloomberg Barclays Asia IG USD Index) have remained relatively resilient compared to peers, falling just -11% YTD, compared to its peers which have fallen by up to -21% (as of 14 Sep) (Chart 1).
In this article, we focus on the Asian USD-denominated IG bond space. We look at reasons to remain positive on these bonds and take a closer look at our newly recommended Asian IG bond fund – United Asian Bond Fund A Dis SGD-H. We believe investors can consider having exposure to Asian IG bonds given the combination of macro tailwinds, attractive yields relative to current credit fundamentals, and structural benefits over peers.
Chart 1: Asian IG bonds have been relatively resilient this year
Macro tailwinds within Asia provide support
We believe the less aggressive monetary policy stances in Asia relative to other major central banks – given comparatively milder inflation pressures – can support Asian bond prices. This is most evident from the policy divergence between China and the US, where the PBOC has engaged in several policy rate cuts, contrasting with the Fed’s aggressive rate hikes this year (Chart 2). Therefore, we believe that the relatively less aggressive policy stance within Asia will prove to be less restrictive on the macro backdrop, which should then help to support corporate fundamentals.
We also see other reasons to be optimistic about Asian economies. Across Asia, international travel is gradually returning to normalcy as the regional reopening gains traction, while domestic restrictions have generally eased significantly as well (Chart 3). Specifically in China, authorities have rolled out aggressive stimulus measures - including the issuance of special infrastructure bonds and tax rebates - to stimulate the economy. As such, this combination of a regional reopening and the prospect of a recovery in China growth prospects should support the region’s growth momentum in the coming quarters.
Ultimately, the supportive growth outlook for Asia should translate into resilient earnings and balance sheets for Asian issuers ahead. This means that their debt repayment abilities should remain very much intact, and we look closer at their credit fundamentals in the next section.
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Chart 2: Monetary policy within Asia remains relatively accommodative
Chart 3: Pandemic measures have loosened significantly this year in many parts of Asia
Asian IG bond yields turning attractive, especially with stable credit fundamentals
As we have highlighted in our recent article, valuations of IG bonds have improved in the year-to-date, as their spreads have already widened. We can also see that nominal yields for Asian USD IG bonds have climbed to over 5%, much higher than its historical average of 3.2% and marking a 13-year high (Chart 4). We believe this was driven broadly by a rise in credit spreads, arising from the (i) uncertain global growth outlook weighing on corporate fundamentals, and (ii) weaker sentiment in the broader Asian Fixed Income space due to weakness in Asian HY segment.
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Despite this sharp increase in bond yields, credit fundamentals remain relatively stable. For instance, the operating cash flow to total debt ratio remains fairly healthy at 33%, much higher than pandemic lows of 22% and slightly higher than its 5-year average of 31% (Chart 5). Similarly, using debt-to-EBITDA as a measure of debt sustainability, we can also see that while the ratio has increased in the YTD to 2.6x, it remains below its 5-year average of 3.1x (Chart 6).
These credit metrics show that debt levels in Asian IG corporates as a whole remain well-managed, and we believe the probability of many fallen angels emerging remains low. So far in the year-to-date, we have seen about 8 fallen angels, which remains on par with pre-COVID levels in 2018, and lower than the past few years (Chart 7).
It is therefore not surprising that the credit quality of Asian USD IG bonds has not deteriorated significantly even amidst rising growth uncertainty. The aggregate credit rating of our barometer Bloomberg Barclays Asia IG USD Index continues to be solid at A2/A3. With the Asian IG bond segment still seeing more upgrades than downgrades in the YTD so far (Chart 8), we believe this supports our thesis above that credit fundamentals remain strong within Asian IG bonds, and that nominal yields therefore look even more attractive given the solid credit fundamentals.
Chart 4: Nominal yields of Asian bonds have climbed significantly above historical average
Chart 5: Asian IG corporates cash flows remain sufficiently robust to support debt …
Chart 6: … while earnings (relative to debt) also show a similar story
Chart 7: Number of fallen angels within Asian bonds remains low
Chart 8: Asian IG bonds continue to see more upgrades than downgrades
Benefits of including Asian IG into your portfolio
While we remain positive on Asian HY bonds, we acknowledge that Asian IG bonds offers a slightly different sectoral allocation. Looking specifically at Asian USD-denominated bonds, both IG and HY bonds offer a relatively diversified exposure (looking at their respective Bloomberg benchmark indices), but Asian IG bonds have a much larger allocation into sovereign bonds (19% vs 8%) while Asian HY bonds have a larger allocation into the real estate sector (21% vs 4%) (Chart 9).
In addition, Asian USD IG bonds (hard-currency) offer a relatively lower duration (5.1 years) compared to their global peers (6.8 years). We currently prefer shorter-duration bonds, as we believe that it is still too early to add significant duration given the rising rate environment. We have reiterated this view in a recent article, and believe that with bonds now looking more attractive than equities, investors can consider investing their fixed income allocation especially into lower-duration bonds.
Chart 9: Asian IG bonds have a notably different sectoral allocation compared to Asian HY bonds
United Asian Bond Fund, our recommended fund
The United Asian Bond Fund A Dis SGD-H is one of our latest additions to our recently unveiled 2022/23 Recommended Funds list! It was incepted in Nov 2017, though its SGD (unhedged) share class has a much longer track record as it was launched in Mar 2000. This fund (under its SGD unhedged share class) was also featured previously on our Recommended Funds list for 7 consecutive years from 2011 – 2017.
Fund objective and strategy
The United Asian Bond Fund A Dis SGD-H seeks to provide stable current income and capital appreciation by investing primarily in investment-grade debt securities issued by Asian corporations, financial institutions, governments and their agencies (including money market instruments).
This is an actively-managed fund which generates alpha through positioning appropriately in duration, credit rating, and bond segments. To do so, it conducts rigorous fundamental research looking mainly at credit spreads and credit analyses to uncover relative value opportunities, coupled with credit diversification as part of its active risk management process. Specifically, they assess bonds based on the expected probability of credit upgrades, and the extent to which the pricing has been reflected in the credit in question, to switch from overvalued to undervalued securities.
Fund positioning
This fund has generally underperformed its benchmark in recent years, mainly due to its exposure to Chinese bonds in 2021, and the rising rates environment in 2022. In light of this, they have adopted a defensive positioning with a preference for quality credits with leading market shares and systemic importance in defensive sectors – we believe this should help to lead to an improvement in performance moving ahead.
Comparing the United Asian Bond Fund with our in-house barometer for Asian IG bonds (Bloomberg Barclays Asia IG USD Index), the fund has a similar duration of 5.2 years compared to the index. As for sectoral allocation, this fund is slightly overweight into Financials, Industrials, and Consumer Discretionary, funded by an underweight in the Energy sector (Chart 10). The fund selects credit based on their fundamental bottom-up research, and they believe that pockets of consumer and industrial names offer a good risk-adjusted return profile.
Chart 10: Fund is slightly overweight in Financials, Industrials, and Consumer Discretionary
Other notable features about this fund
Apart from our recommended Dis SGD-H share class, the United fund offers other distribution share classes like USD (unhedged) and SGD (unhedged), as well as an accumulation share class (SGD-H). We have recommended the SGD-hedged share class for our Singaporean investors who wish to minimise the effects of currency fluctuations on their returns.
In addition, for our income-seeking investors, the United fund expects to make monthly distributions (4% p.a.), which is generally more frequent than many other funds with distributing classes (which tend to do quarterly semi-annual distributions instead).
Final thoughts on United Asian Bond Fund
To sum up, we continue to remain positive on Asian IG bonds, given multiple positive tailwinds from top-down macro factors, to bottom-up factors like yields and credit quality. We recommend the United Asian Bond Fund A Dis SGD-H for investors looking to gain exposure into Asian USD-denominated IG bonds.
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