01 March 2018, 10:16 GMT
This content was first published on 5 February 2018.
Much is made of the fundamental strength generally found in Asia and of the significant yield and spread pickup investors can find in the region compared to its global counterparts. While those fundamentals and relative value propositions are present for Asian investment grade (IG) bonds, they are not why we expect the asset class to be supported over the coming quarters and years. Instead, our constructive thesis on Asian IG is primarily built on technicals. That technical support we see has both a supply and a demand side component.
1. Hitting $1 trillion will be a key inflection point
The Asian IG market has tripled in size over the last five years. Today, the market stands a bit larger than $600 billion, and we estimate it will reach $1 trillion by 2020. At $1 trillion, we expect to see increased sell-side coverage and increased consultant endorsement. The greater coverage will lead to even greater investor participation.
2. Risk-reward trade-offs will improve as the market grows
Since 2010, the number of issuers in the standard index has jumped from ~200 to ~800. Over the same time, diversification has improved as well. While a couple sectors represented over 20%, each, of the market, today that distribution across sections is much more uniform. Continued growth also brings new issuance which often comes from first-time issuers and offers investors attractive premiums.
1. China onshore demand will be significant
The general RMB devaluation has led to a notable increase in USD deposits by onshore companies in Chinese banks. Chinese banks, in turn, look to invest these proceeds and favour debt from issuers with whom they have existing credit lines -- namely Asian issuers. While the RMB will increasingly trade in both directions as the Chinese economy continues to open we expect a consistent and substantial pool of dollar deposits which will be invested in Asian IG bonds.
2. European institutional demand will increase marginally but be meaningful
The yield dilemma is as present in Europe as it is anywhere. The disparity between particularly low yields in Europe and those in Asia provides a natural incentive for investors to consider an allocation to the latter. European investors have been participating in 10-20% of the new issuance coming out of Asia. We see absolute levels of participation to increase, which, from a large buyer base will provide considerable support for the Asian IG asset class.
Driven by technicals, the future is bright and well-supported for Asian IG.
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