The Asia HY Credit Index confronted many of the same challenges as other asset classes last year, with the added headwind of China’s property sector. Disaggregating returns for Asia HY Credit between China and ex-China, the Asia HY Credit ex-China returned -11% in 2022, in line with global high yield, while the same index with China included returned -21%. The performance of Asia HY credit with China was driven largely by the Chinese real estate sector, which returned -28%.
Outlook for 2023 and beyond
We believe Asia credit looks attractive. While macro uncertainty remains, for investors with a long-term orientation, investing in Asian credit markets may generate strong total returns. The major global central banks have reacted aggressively to elevated inflation, but we expect rate-hiking cycles to end in 2023, providing an upside to fixed income sectors with attractive spreads. While our overall outlook for Asia credit is favorable, we believe portfolio positioning will need to remain dynamic with rigorous focus on credit selection to identify opportunities and avoid value traps.
The overall JACI index was yielding close to 7.0% in late 2022, its highest yield level since 2010. This represents a dramatic repricing since the start of 2022 when Asia credit yielded 3%. Compared to other fixed income credit sectors, we believe this represents a historically attractive entry point for a relatively low-duration asset.
Lower new issuance will likely see negative net supply of Asia credit in 2023, even after the significant reduction in supply seen in 2022. As investor demand returns to Asia credit, attracted by high “all-in” yields and compelling return opportunities, constrained debt supply should provide additional technical support to the market.