Insight

Why Asian credit in 2023?

Why Asian credit in 2023?

In this Q&A we speak with Gigi Guo and Cassie Tan from Invesco Fixed Income on the themes they are seeing in the Asian credit space and where they believe investors may find opportunities. 

Q: Which countries do you expect will drive economic growth in 2023 amid expectations of a global recession?  

A: We believe Asian countries will lead global economic growth in 2023 driven by the stronger private consumption and sovereign profile alongside moderate inflation. While global consumption is likely to suffer from a meltdown in 2023 as the risk of a global recession rises, we expect the consumption in Asia to pick up significantly under Greater China’s reopening. As  economic mobility and activities have picked up since the pandemic restrictions were lifted, we foresee a strong recovery across the area, and consumption in other Asian countries is likely to be positively impacted and as is the growth of their economies. The beneficiaries are likely to include Australia, Maldives, Japan, Thailand, etc.

Figure 1: China’s scheduled flights to EM Asia

Source: OAG Schedules Analyzer, J.P.Morgan

Figure 2: China box office, RMB mn, 7dma

Source: China Film Administration, J.P.Morgan

Q: What role will regulation play in China’s economic recovery this year?

A: We expect China to enjoy more supportive policy tailwinds along with the economy recovery. In the latest World Economic Outlook , the International Monetary Fund (IMF) raised its forecast on China’s economic growth to 5.2%1. During the recent Local People’s Congress, most provincial governments released ambitious GDP growth targets of above 5% for 2023. Based on these aspirations, we anticipate that monetary and fiscal policies as well as other sector supports shall remain accommodative so as to act as an additional catalyst for the country’s economic recovery.

Figure 3: GDP forecasts by country

Source: IMF World Economic Outlook. Data as of January 2023. There is no guarantee that the forecast will be reached.

Q: What is your outlook for China’s property sector?

A: The real turning point for China property has arrived. The Chinese government finally started supporting property developers to ease the liquidity crunch, which has been leading the recovery in valuations for Asia high yield (HY). We believe the rally that has resulted from an improvement in the sector’s fundamentals is likely to continue. Apart from the regulatory support to their financing channels, an improvement in sales is likely to be more critical for the sustainable recovery of China’s property sector.

Figure 4: State-owned enterprises and quality privately owned enterprises obtain more credit lines from banks (RMB trillion)

Sources: Company announcement, Cailianshe, Guandian, CREIS, HSBC. Data as of 29 December 2022.

Q: How do you expect the default rates for Asia credit to fare in 2023?

A: We believe we will see a much lower default rate for Asia credit in 2023. Default rates are likely to have peaked in 2022 due to the defaults of China HY property issuers. We expect defaults to decrease significantly based on the improvement in the China property sector and the stable credit profile for non-China credits.

Q: Where do you see opportunities in Asia credit in 2023?

A: Asia HY new issues have been noticeably light and are expected to remain muted going forward. Low net supply in Asia HY and China investment grade (IG) can support market technical in 2023. Current valuations of Asian credit especially Asia HY still look very appealing and offer further potential of spread tightening. We still favor China and Hong Kong credit despite the recent outperformance. We also see that Macau credit and selective Southeast Asia credit provide good carry. Australia and Mongolia credit should also benefit from China outbound travel and, more importantly, increased commodity demand.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.

Related Articles