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Q2 2024 Update from the Asia Trade Floor

What is driving the performance of the Asia credit market? Join the discussion between Asia portfolio manager Stephen Chang and credit product strategist Jingjing Huang.

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Text on screen: Jingjing Huang, Credit Product Strategist

Jingjing Huang: Hello, I’m Jingjing Huang, credit product strategist. Today, I’m delighted to have portfolio manager Stephen Chang here to discuss the latest developments in the economy and markets, and what they mean for you.

Text on screen: Stephen Chang, Portfolio Manager, Asia

Stephen Chang: Thanks for having me, Jingjing. There's certainly plenty to discuss.

Jingjing: Absolutely, Stephen. Let’s start with the Asia credit market, it has done well this year, especially high yield bonds. One of the key Asia High Yield benchmarks has increased in value by almost 7% from the first of January to the start of April. What has been driving this performance?

Stephen: The fundamental outlook and sentiment for high yield names outside the property sector has noticeably improved. Asia credit spreads have tightened by about 50 basis points for the overall market and 200 basis points for high yield, outshining most global credit benchmarks.

When spreads tighten, it means that the difference between what these bonds pay, compared to very safe investments like government bonds, has gotten smaller. This usually signals that investors feel more confident about the market, since they are willing to accept less excess return for taking on greater risk. This tightening of spreads has been a major contributor to the excess returns for the Asia credit market.

Text on screen:

Asia credit spreads have tightened. What does this mean?

  • Credit spread = the difference between the interest paid on bonds that have a low level of risk, such as government bonds, and the interest paid on those that have a high level of risk
  • Spread tightening usually signals that investors feel more confident about the market

Jingjing: Although that has also led to tighter valuations.

Stephen: That is true. However, even though these bonds are more expensive now, there's another factor at play. We're not seeing as many new bonds being issued, which could imply less technical pressure for spreads to widen significantly.

Another factor contributing to the outperformance of Asia Credit benchmarks is their shorter duration compared to global counterparts, which means they are less affected by changes in interest rates while benefiting from economic expansion.

Additionally, there is an interesting pattern we’ve noticed in Asia: when interest rates go up, spreads tend to tighten. This trend is driven by demand from yield-seeking buyers within the region. It helps to keep the market stable and supports strong performance.

Text on screen:

Why Asia credit benchmarks have outperformed this year

  • Tightening of spreads
  • Less sensitive to interest rate changes
  • Demand from yield-seeking investors

Jingjing: What is our outlook for the Asia credit market?

Stephen: In general, we expect a more stable market ahead, given the strong technicals and still low supply in the new issue market. The market’s appetite for risk appears to be returning.

We remain focused on maintaining a relatively more resilient portfolio and more diversified exposure towards broader Asia, while also keeping a bias for caution in the weaker sectors and flexibility given the market isn’t pricing much volatility, despite geopolitical risks and election uncertainties.

Jingjing: It sounds like we're navigating the Asia credit market with a balanced approach. Shifting gears a bit, PIMCO recently shared its outlook for the global economy and markets. Could you highlight a few key takeaways?

Stephen: Yes indeed, we recently published our latest outlook for the next 6 to 12 months, aptly titled “Diverging Markets, Diversified Portfolios”. We believe that the global investment landscape is set to produce more dispersed returns in the months ahead, as the trajectories of major economies diverge more noticeably.

While many large, developed market economies are slowing, the U.S. has maintained its surprisingly strong momentum, with several supportive factors poised to persist. It looks like an economic soft landing remains achievable in the U.S., with current market pricing suggesting a low likelihood of recession.

However, we think risks of both recession and renewed inflation remain magnified in the aftermath of unprecedented global shocks to supply and demand, along with varied government and central bank responses.

Text on screen:

Key takeaways from PIMCO’s latest outlook on the economy and markets

  • Global investments expected to produce more varied returns, as the paths of major economies increasingly diverge
  • U.S. exceptionalism may persist amid global stagnation
  • Risks of recession and renewed inflation remain high

Jingjing: What about emerging markets, what's our view on the opportunities and challenges there?

Stephen: In our view, emerging market debt offers an attractive source of steady returns and diversification amid supportive global economic and monetary policy conditions.

That said, there will be differentiation among the many countries in the emerging market space.  We see more attractive opportunities in economies where central banks have been ahead of the curve and for those with local rates that enjoyed a real yield advantage versus those in developed markets. We believe the best way to benefit from emerging markets right now is by investing in some of these currencies.

Jingjing: Thank you, Stephen, for your sharing, and thank you to everyone who joined us today. Stay tuned for more updates as we navigate these complex markets together with you. Goodbye!

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