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June 2024
AAM Magazine
June 2024
Back to 2023 Best of the Best Awards Supplement

Asian credit leading the way in fixed income

By Elizabeth Dooley   

With US inflation showing signs of softening and tighter lending conditions amid US regional bank saga, we could potentially see a change of Fed’s monetary policy stance sometime this year, according to Murray Collis, chief investment officer, fixed income (Asia ex-Japan) of Manulife Investment Management.

The major headwind of steep monetary tightening in the past year, he says, could move to a tailwind in 2023 and become a favourable setting for global bond markets. 

“We believe the Asia region is supported by benign inflation environment and a China-led recovery, where China’s reopening may have a positive spill-over on other Asian economies,” he adds.

For Manulife Investment Management, winner of Asia Asset Management’s Best of the Best Awards 2023 for Asian Bond House of the Year, the broad Asian bond market presents significant opportunities for long-term investors. Here, Collis believes Asian credit is poised to be the main contributor to fixed-income returns throughout 2023.

Meanwhile, Head of Global Emerging Markets Fixed Income Research Fiona Cheung, cites China’s property market slump last year as having created price dislocations and a fertile opportunity set for fundamental-driven investing. Cheung is based in Shanghai overseeing all Manulife Investment Management’s China credit research activities with the help of Judy Kwok, head of Greater China fixed income research. 

“The Chinese property sector has been a laggard in credit after the government assumed a new, yet unofficial regulatory stance in August 2020. We believe November 2022 marked an inflection point in terms of policy measures and effectively put a floor under the market and bolstered investor confidence,” she tells AAM. “In our view, the property sector’s continual recovery should extend over the next two to three years and should ultimately emerge healthier post consolidation with issuers that have sustainable debt levels and are able to operate with greater economic efficiency,” Cheung adds.

New fund management brand in China

To further deepen its presence and investment connectivity in China, last year Manulife Investment Management initiated a JV acquisition in China. In November 2022, the company became the first foreign asset manager to successfully obtain the China Securities Regulatory Commission (CSRC) approval for converting its joint venture retail fund management business to a fully-owned fund house, named Manulife Fund Management. 

“This successful launch of our wholly-owned fund house allows us to combine the long-standing China fund management experience with our globally integrated investment platform to better serve investors in China. We understand the recipe for success in China is a combination of local expertise and the ability to integrate global investment capability. Importantly, continued strengthening of our bottom-up fundamental credit research capabilities, effectively combining onshore and offshore perspectives in China bond markets, consistently applying a time-tested research approach allow us to differentiate and navigate these markets in time of crisis. We continue our commitment to proprietary credit research, further building out our onshore presence and shaping the development of onshore China bond market,” explains Cheung.

Outside of China, Collis welcomes the introduction of the new JACI Asia Pacific Index in the second quarter of 2023 which marks the next evolution of the Asia credit market. This extension of the investment universe via the new index broadens exposure to Asia-Pacific including Japan, he says, reduces the overall concentration in single markets or sectors and may prove attractive for investors looking for broader exposure to the Asia-Pacific region, with the potential for an improved risk-return profile as well as lower volatility. 

Long-term opportunities

As one of the leading Asian bond managers and long-term asset owners, the firm has actively invested across the broader Asia-Pacific fixed-income universe, including Australian and Japanese issuers, for well over a decade. “From our experience, we view such credits as typically well-supported by global and Asian investors for its relatively high credit rating and we tend to find issuers with strong ESG attributes,” notes Collis. Besides total return and income investing, he points to growing interest from Asia and global investors in sustainable investing to take advantage of the ESG opportunities offered in Asia. 

“We are expecting an overall pick-up in bond issuance across Asia in 2023, which should result in a record year of ESG-labelled bond issuance in the region as market conditions normalise.”

Recent examples of growing issuance and demand for Asian ESG sovereign bonds include inaugural issues from Singapore last year and India in January 2023. As for Asian ESG corporate bonds, new issues year-to-date have been generally well received by market participants, and Collis is hopeful to see further diversification of sectors and new issuers coming to the primary market and expects to see further growth in newer structures like blue bonds, sustainability linked bonds and transition bonds.

“We believe Asia is uniquely positioned in the global context benefiting from a China-led recovery and sound credit fundamentals. Our view is that Asia Pacific banks are well-positioned to navigate the US-Europe banking turmoil. We also expect Asia’s economic growth differentials to widen compared to developed markets, and with Asian investment grade corporate issuers and Asian high yield issuers yielding around high-5% and 12% on average respectively, these areas present compelling all-in yields for investors. Asian currencies are also poised for better performance with a weakening US dollar and resilient regional growth prospects. Asia’s expansive economic trajectory combined with broad diversity of bond issuers provide investors globally with compelling portfolio diversifications benefits,” Collis concludes.