Asian debt offers stability in a volatile world

Asia is more stable compared to other regions because of a combination of factors.

First, it has the highest average credit rating in emerging markets (EMs). Second, some of the region’s countries, such as Singapore, Hong Kong and Korea, are highly developed. Third, Asia has less political instability than other regions. All these factors have resulted in Asia displaying the best risk-adjusted returns as measured by the Sharpe ratio over the past five years.

Another reason for the steadiness of Asian debt is its relatively short duration. Asian corporates have the lowest interest rate duration among EM and also compared to US credit, making the asset class less sensitive to changes in US interest rates. With the US Federal Reserve on its path to normalise interest rates, spread products like Asian credit with lower interest rate sensitivity would prove more resilient in the coming months.

Global investors tend to lump Asian debt into the broader emerging market debt asset class. But this approach ignores significant differences and alpha opportunities within emerging markets. A dedicated allocation to Asian debt can help to capture the EM premium with lower volatility. Investors looking to diversify away from a global bond portfolio – where the Asian exposure is low in global bond indices – may also benefit from an allocation to Asian credits. And developing Asia is the engine of the world, contributing 60% to global growth.

Despite delivering similar returns to debt in Central and Eastern Europe, the Middle East and Africa (CEEMEA) and Latin America between the start of 2014 to end-April 2017 (21% in USD terms), Asian corporates managed to avoid the wild gyrations seen in these other regions. For instance, Latin America dropped sharply in the second half of 2015 amid Brazil’s corruption scandal involving state-owned oil company Petrobras and a sharp decline of commodity prices; and CEEMEA lagged in 2014 as international sanctions against Russia caused a collapse of the ruble and sparked Russia’s financial crisis.

Joep Huntjens – Head of Asian Fixed Income – NN Investment Partners