Navigating Rates

Asia fixed income: positioned for outperformance?

With favourable growth and inflation dynamics, relative value against developed markets and potentially some big alpha opportunities emerging in China, we believe the outlook for Asia fixed income is strong in 2024.

Key takeaways

  • Asia’s growth outlook is more resilient than in developed markets, thanks to a tech cycle rebound and greater capacity for fiscal support.
  • Asian central banks can ease monetary policy at a slower pace than developed market counterparts, which could mean higher yields and capital inflows.
  • Corporate fundamentals look favourable, with most sectors in the recovery phase of the credit cycle which tends to feature improving margins and decreasing leverage.
  • We believe investors can look through negative headlines around China’s property sector, and we see some of the biggest alpha opportunities in China high yield bonds.

Despite a challenging global macro backdrop and heightened market volatility, Asian fixed income assets delivered decent absolute returns in 2023, with Asia local currency bonds up 6% and the JP Morgan Asia Credit Index (JACI) – a popular index of USD-denominated Asian sovereign, quasi-sovereign and corporate bonds – up 7%.1 Even China fixed income shrugged off negative sentiment around the country’s property sector crisis and softer-than-expected post-Covid reopening, with investment grade bonds returning 6.8% and Chinese government bonds 3% in USD terms.2

In our view, Asia fixed income is strongly positioned for this year. From a macro perspective, Asian economies’ growth outlook is more resilient than for developed markets, thanks to a tech cycle rebound and selective fiscal support led by China and Thailand. On monetary policy, we see Asian central banks easing less than their developed market counterparts, which would imply better relative value for Asia bonds and potential capital inflows. The six major elections in the region this year are unlikely to derail the core narrative, as we expect smooth transitions and policy continuity in major countries such as India and Indonesia. China’s increased policy support (both fiscal and monetary) is expected to put a floor under growth, and we believe investors can look through negative headlines around the property sector as it searches for equilibrium. However, with sentiment and positioning on China arguably at an all-time low, we see ample opportunities amid significant market dislocation.

Looking longer term, we believe Asia has entered a multi-year virtuous cycle. Stronger economic fundamentals, pro-reform governments, superior infrastructure ecosystems, favourable demographics and relative political stability should all enable the region to capture new growth opportunities and attract large capital inflows, which over time will lead to lower FX volatility and significant repricing of local bonds and credits.

Our positive outlook for Asia fixed income in 2024 is based around four key themes:

1) Favourable growth and inflation dynamics

We expect demand for AI chips and inventory normalisation in electronic products to support a moderate recovery of the technology cycle in Asia in 2024. Cyclical growth will pick up among the electronics exporters, while the ongoing structural tailwinds from electronics supply chain diversification continue to support fixed capital formation in ASEAN countries. For the other economies, resilient domestic demand will continue to support relatively high growth rates. Investment growth is expected to remain a key growth driver for India and the Philippines, while election-related spending and post-election investments will support Indonesia’s growth for 2024.

China’s economic stimulus will mostly be transmitted through investment growth, funded by fiscal expansion. Property investment should gradually pick up from the bottom, supported by urban village redevelopment, while infrastructure and manufacturing investments will benefit from strategic objectives in green infrastructure and advanced manufacturing. Given the trade linkages, Asia is expected to benefit more from the spillover effects of China’s investment growth relative to consumption, potentially lengthening its cyclical rebound in manufacturing.

Disinflationary trends in Asia should continue into 2024, though at a slower pace due to less favourable base effects on energy and food prices as well as subsidies rollback. That said, core inflation momentum remained subdued for most countries in Asia, while headline inflation surprises might persist until the second quarter before the effects of the “El Niño” climate phenomenon fade. Price shocks, if any, would probably be mitigated by fiscal policy, such as the Philippines’ recent extension of reduced import tariffs for food and coal. 3

2) Smoother policy paths point to relative value vs. developed markets

Asian central banks overall pursued a much less aggressive rate hiking cycle during the post-pandemic inflation spike than their counterparts in the major developed economies or emerging market regions such as Latin America.

Instead, Asian countries deployed multiple policy tools to mitigate inflation, such as supply side policies, quasi-fiscal subsidies to smooth the energy shock, FX reserve intervention, and capital flow measures. Overall, Asian economies’ inflation data consistently undershot other regions and many reached their targets much earlier.

Asian central banks can therefore be expected to ease much less than other developed markets, particularly given their more resilient growth. As a result, Asian bond yields should look high relative to developed market bonds, which could drive capital inflows for Asian local currency bonds.

Exhibit 1: Less policy easing priced in for Asia
Exhibit 1: Less policy easing priced in for Asia

Source: Bloomberg, AllianzGI, 7 February 2024.

3) A credit cycle “sweet spot” and a floor for Chinese real estate

Most Asian credit sectors are in what we might call the “sweet spot” of the credit cycle – ie, the recovery stage (see Exhibit 2), which generally features right-sized businesses, improving margins and decreasing leverage. We see sectors such as Macau gaming, Indonesia industrials, China manufacturing and India infrastructure as being in this sweet spot currently. Even for sectors that are in the expansion stage, such as Indian utilities and India cyclicals, strong capital structures and balance sheets with solid sponsorship should mitigate excessive capex and re-leverage risks.

Exhibit 2: Asian corporates’ position in credit cycle
Exhibit 2: Asian corporates’ position in credit cycle

Source: AllianzGI, 31 December 2023. The above is for illustrative purposes only and is not a recommendation or advice to buy or sell. Past performance, or any predication, projection or forecast, does not predict future returns. There is no guarantee that these investment strategies and processes will be effective under all market conditions and investors should evaluate their ability to invest for a long-term based on their individual risk profile especially during periods of downturn in the market.

As for China real estate, we believe investors should now look past the headlines regarding the distressed part of the market, which emerged again after a Hong Kong court ordered the liquidation of property giant Evergrande on 29 January.4 Instead, we believe the focus should be on China real estate’s “survivors”, which have weathered the worst credit downcycle in the sector's history. The privately owned developers still standing will ultimately emerge from the crisis much stronger in terms of operations, brand name, market share and financial health.

We believe the default cycle is coming to an end (see Exhibit 3), supported by a clear shift in property policy to help alleviate the liquidity crunch in the market. While the “physical” property market will need a few more quarters to clear up excess inventories before it reaches a new equilibrium sales level for the next 3-5 years, the critical point for credit investors is that the default rate should drop significantly from the level the market has experienced over the past three years. In our view, this makes China high yield bonds more likely to realise the double-digit yields they currently offer.

Exhibit 3: End of China default cycle positive for Asia high yield
Exhibit 3: End of China default cycle positive for Asia high yield

Source: BofA Global Research, AllianzGI, 31 January 2024

4) China adapting to new normal

Away from real estate, the challenge for China is the evolution of its economic model. In our view, China is unlikely to go back to its old growth-oriented model, which relies excessively on borrowing and channelling excess savings into unproductive investment to boost GDP. The Chinese leadership has clearly made up its mind to shift towards a new and “high quality” growth model which is more multi-faceted in nature. The shifts in policy and priorities seen since middle of last year are driven by the leadership’s realisation of the challenges brought by both cyclical and structural factors in achieving such goals, and hence the leadership has become more realistic on execution and timeline.

We think this “zigzag” path will be the norm for China macro in the foreseeable future. Such a backdrop would require all participants in the economy – governments, households, corporates, financial institutions and investors – to adjust expectations and adapt to the new normal. It will be a game of survival of the fittest across all sectors. In credit, we think bottom-up fundamental credit selection will be key for alpha generation, particularly given significant market dislocation.

We think China investment grade will continue to deliver low volatility and decent carry in 2024, thanks to solid corporate fundamentals and strong technical support. But it is in China high yield where we see the biggest alpha opportunities. The China high yield credit market will remain volatile, driven by sentiment and high frequency data, but it is credit fundamentals that ultimately lead to repricing. With fundamentals driving credit selection, China high yield may offer opportunities that can withstand the bumpy path to normalisation and repricing.

1 Bloomberg, AllianzGI, 31 December 2023
2 Bloomberg, AllianzGI, 31 December 2023
3 Nikkei Asia, 26 December 2023. Philippines extends tariff cuts on imported rice to fight inflation - Nikkei Asia
4 Reuters, 29 January 2023. China Evergrande ordered to liquidate in landmark moment for crisis-hit sector | Reuters

  • Disclaimer
    Investing involves risk.The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

    This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

    This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).

    3362184

Recent insights

Despite a rollercoaster few years in terms of global macroeconomic performance – and ongoing geopolitical uncertainty – one area which has proved particularly resilient is consumer spending.

Discover more

Navigating Rates

Until the macroeconomic outlook becomes clearer, the favourable supply-demand dynamic in fixed income is enabling investors to diversify portfolios and prepare for all eventualities in the next rate-cutting cycle – be it fast or slow.

Discover more

Embracing Disruption

Despite some setbacks in 2023, global additions to renewables witnessed a robust growth also driven by COP 28's pledge to triple renewable energy capacity.

Discover more

Allianz Global Investors

You are leaving this website and being re-directed to the below website. This does not imply any approval or endorsement of the information by Allianz Global Investors Asia Pacific Limited contained in the redirected website nor does Allianz Global Investors Asia Pacific Limited accept any responsibility or liability in connection with this hyperlink and the information contained herein. Please keep in mind that the redirected website may contain funds and strategies not authorized for offering to the public in your jurisdiction. Besides, please also take note on the redirected website’s terms and conditions, privacy and security policies, or other legal information. By clicking “Continue”, you confirm you acknowledge the details mentioned above and would like to continue accessing the redirected website. Please click “Stay here” if you have any concerns.