Asia Deserves Some Credit
Read our latest article highlighting Asian corporate credit and the potential of the fastest growing region in the world.
This $50 trillion asset class has the potential to provide significant benefits for those seeking exposure to the geographical engine of world growth, including reduced correlation to traditional equity and credit markets, and higher potential returns. Below, we discuss the supply and demand imbalances that have recently created significant opportunities in this under-the-radar sector of the fixed income market.
The World’s Growth Engine
Before diving into Asian corporate credit as an asset class, it’s worth exploring the macro view of the region (which, for our purposes, notably excludes Japan² ). Asia is the fastest growing region in the world and has been for the last few decades, making it the undeniable engine of global GDP growth over the long term. Since 2010, Asia has contributed, on average, about 60% of yearly global growth – that’s up from about 43% in the 2000s³ . Perhaps most importantly, Asia’s growth has been resilient during periods of economic weakness. For example, in 2009, world GDP fell by 0.1%, with the U.S. and European economies shrinking by 2.5% and 4.8% respectively. Meanwhile, that same year, Asia’s GDP grew by 6.4%⁴.
The incredible growth of the region over the years has helped diversify Asia from what was once a resource- and manufacturing-heavy economy into one which is increasingly consumer- and services-focused (though manufacturing and core industries still play an important role in the regional economy). The result is that Asian businesses, ranging from global banks and manufacturing to major tech firms, have matured and taken their place among the largest in the world. Thus, investors now have the ability to invest in companies outside of traditional developed markets and which have underlying fundamentals that are increasingly comparable to more well-known Western counterparts. For example, as of 2018, the largest four banks in the world by assets are all based in China, and the largest, The Industrial and Commercial Bank of China, has more assets than Wells Fargo and Citigroup combined⁵. Admittedly, Emerging Markets, particularly Asian equity and credit markets, had unimpressive performance in 2018, as geopolitics, trade war and growth fears drove many investors out of the region. Specifically, in the Chinese credit markets, the combination of a conscious tightening of credit by the regulators and the maturing bond market’s first major defaults brought about a widening of spreads and lower prices across onshore (i.e., bonds traded in mainland China in CNY) and offshore (i.e. bonds traded in CNH outside of mainland China) debt. However, looking at the longer-term picture, it’s easy to see the region’s potential, given its ongoing growth and strong government balance sheets. Yet despite these strong fundamentals, the bonds issued by many Asian corporations have historically offered higher yields than their peers in the developed world, a phenomenon known as the “Asian Premium”.