IFR Asia Outlook for Asian Credit Roundtable 2019: Clearer skies

The skies have cleared, and Asian credit is on a roll. After the end of 2018 produced one of the stormiest periods in years, the retreat of major headwinds has helped cement a solid backdrop for Asian bonds at the start of 2019. The US Federal Reserve has slammed the brakes on monetary tightening, trade tensions have subsided for now, and market stability has become a top priority for China as it wrestles with deleveraging its economy.

Investors have taken this as a glaring sign that it was time to return to Asian credit, and in a big way. So far this year, they have pounced on opportunities to buy Chinese high-yield bonds, and those that were brave enough to take positions during the volatility of late last year have made handsome returns.

IFR Asia convened a panel of specialists in Hong Kong on March 1 to discuss the extent of the rally, and panelists unanimously agreed that there is still some room to go. From a ratings perspective, the outlook for credit is stable, while tight onshore yields have the potential of luring more Chinese investors back to US dollar markets.

This comes among signs that

the market is also maturing as a whole. After a series of bond defaults, offshore and onshore investors

are learning that the practice of ignoring the underlying credit is

not the right path to investing in Chinese bonds – even when the issuers appear to be backed by local governments.

These realisations are driving a clearer distinction between issuers that are worthy of international capital, and those that aren’t. After years of one-way traffic, investors are now focusing on fundamentals and picking their spots carefully.

Challenges still abound. One panelist raised concerns about how China’s deleveraging campaign leaves pockets of tight credit conditions that could slow down the country’s economic rebalancing, while expectations of massive supply from the PRC banks, simmering trade disputes, Brexit and geopolitical crises could all turn the tide.

Investors will need to stay disciplined about credit differentiation, but this period of stability looks to have longer to run – barring, of course, any nasty surprises.