At AlbaCore, we focus on the long-term. As one of Europe’s leading alternative credit specialists, we invest in private capital solutions, opportunistic and dislocated credit, and structured products.
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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.
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With stubborn inflation in the United States, uncertainty in the Fed’s rate cut trajectory, as well as heightened geopolitical risks, the global economy is poised for a volatile year. As an investor, how can one navigate a difficult investment landscape?
In spite of challenging market conditions, we see major advantages in Asian investment grade credit. Given its high-quality credit fundamentals, resilient valuation, and strong technical support, Asian investment grade credit present investors with an attractive investment proposition.
The U.S. economy is expected to slow, and Europe is grappling with weak growth. However, against this backdrop, Asia remains the fastest-growing region, with growth forecasts for 2025 remaining higher than that of Europe, the U.S., and emerging markets (excluding Asia). Some Asian countries benefit from ongoing technological upgrade cycles, providing resilience to specific Asian markets, while others such as India and Indonesia supported by strong domestic growth.
From a policy support angle, the benign inflation backdrop of Asian economies allow Asian Central Banks the flexibility to support domestic growth against weakening broader growth without sparking inflationary fears. As a resource-rich region, Asian countries also have unique advantages as it pursues economic advancement in the global value chain. Additionally, some parts of the region benefit from a younger demography and growing labor force.
With sound fundamentals, low volatility, low interest rate risk, and strong demand-supply technicals, Asian Investment-grade bonds are poised to provide a strong case for investors seeking robust returns given the uncertain and volatile market conditions.
The credit fundamentals of Asian investment-grade bonds remain sound, with lower net leverage compared to U.S. investment-grade bonds. The default rates of Asian (excluding China) investment-grade bonds have generally been lower than those of the U.S., with last year's default rate below 1%. Many Asian bond issuers are backed by respective countries’ sovereign or government entities, adding to their resilience during market downturns.
Over the past five years, the overall volatility of Asian investment-grade bonds has been lower than that of products in the U.S. or globally. Part of this is due to the more captive investor base in Asia. A significant proportion of Asian investment-grade bonds are held by Asian based institutional investors with a strong home bias, thus reducing the impact of market volatility due to sell-offs and enhancing overall stability in prices. Additionally, interest risk in Asian investment-grade bonds is generally about 40% shorter than that of U.S. investment-grade bonds1, cushioning the impact from interest rate volatility.
We expect Asian investment-grade bonds to continue to remain in short supply for the 4th consecutive year in 2025, thus providing support for prices in the asset class. Despite a pick-up in issuances, the higher amount of bonds maturing would provide strong technical support for the credit spreads of Asian investment-grade bonds. In contrast, the ample supply of U.S. investment-grade bonds could render US credit spreads more susceptible to volatility.
As a final sweetener, Asian local currency bonds in the region could benefit from the return in capital flows as US policy rates decline, and the revival in Asian currency strength could drive returns in local Asian bonds.
1Source: J.P.Morgan US Liquid Index, as of end of December 2024
Source: First Sentier Investors, 17 February 2025
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