Re-Mapping the Opportunity in Asia Credit

• The Asia liquid credit market has fundamentally transformed. It is now predominantly investment grade (IG), sovereign-anchored, and developed-market in character. What was once considered an emerging markets allocation is no longer your grandmother’s EM. We believe Asia liquid credit has outgrown that bucket.
• The standard EM benchmark is more concentrated and more cyclical than it appears on its face. What may seem like diversification is largely commodity beta, energy sector concentration, and a long tail of frontier risk dressed up as “breadth”.
• Mapped appropriately to its risk, Asia liquid credit delivered nearly identical returns to ex-Asia EM IG over the last three years, at 5.5% annualized, at a third of the volatility¹ and less than half the maximum drawdown. Same return profile but smoother ride.

A map has one main objective: to tell you where things are. But every map can also serve as a snapshot, capturing the world as it was on the day it was drawn. In this day and age, the best maps get redrawn as the terrain shifts; the friendly disclaimer being maps pre-AI. Asia credit has been navigated by an old map for the better part of a decade. It appears on the page, clearly labeled, frequently filed under emerging markets, and left alone while the terrain underneath continues to evolve and change.

The Asia liquid credit market is a distinct example. The asset class that exists today bears only a passing resemblance to the one that earned the emerging markets label not too long ago. Over the past five years, Asia liquid credit has undergone a quiet but fundamental transformation in our view. Since 2020, Asia credit has shifted from a China-dominated market to a broader, more diversified opportunity set led by developed countries. The high yield share of the market has also shrunk materially. As a result, investment grade credit now commands the majority of the opportunity set for the region in public markets. Within that IG bucket, the rating distribution skews heavily toward single A and AA. This differs from the BBB-heavy construction most allocators associate with IG benchmarks globally. The rating alone tells a different story from the label.

EXHIBIT 1: Today’s Asia liquid credit market has continued to evolve: over 90% of the market is investment grade and China real estate exposure in Asia High Yield has fallen from 45% to 3%²

Asia Liquid Credit is Predominently Investment Grade

The country mix tells a similar story. Japan, Australia, Korea, and India have expanded their footprint as China’s weight has receded. Today, somewhere between 60-70% of Asia liquid credit sits in developed or investment-grade Asia buckets³. Approximately 70% of the asset class is directly or indirectly linked to sovereign risk⁴, through quasi-sovereigns, state-linked banks, and national champions carrying implicit government backing. This is the architecture of a sovereign-anchored, investment-grade market, one that happens to offer yield pickup over comparable developed market credit at a duration profile that is, for most institutional portfolios, genuinely more useful. Japan is the world’s fourth largest economy and Australia ranks twelfth⁵. These are not emerging markets by any conventional definition.

EXHIBIT 2: The opportunity set is broad, diversified and heavily tilted toward developed markets⁶

The numbers make the case plainly. APAC IG bonds carry an average duration of 4.9 years, against the 6.5-year duration of US IG⁷. On a spread per unit of duration basis, the asset class is attractive across every rating bucket, from AA down through BBB-, with Asian spreads consistently wider than U.S. equivalents at comparable ratings. Active management has historically been able to extract an additional 50 to 60 basis points⁸ of yield beyond index-level returns by navigating the relative value embedded in a market that most global capital is not positioned tactically to fully explore.

The default record adds another coordinate to this map. Since the China property development crisis, there has been virtually zero instance of a direct IG default in APAC credit markets. Between 1993 and 2023, Asia recorded 133 corporate defaults in total, a small fraction of the 3,410 recorded globally⁹ over a similar horizon. Outside of Chinese property and a narrow cluster of local government financing vehicles, the credit resilience of this market has been, by any serious measure, exceptional in our view.

Look carefully at what the EM label contains, and the contrast between that world and Asia Pacific becomes difficult to ignore. Strip Asia out of the standard EM universe and the residual concentrates quickly. Mexico, UAE, and Brazil together account for roughly 28% of the remaining EM universe¹⁰. Three countries carrying the weight of an entire asset class, and each one screening weaker than Asian counterparts on fiscal resilience, economic diversification, and geopolitical stability.

EXHIBIT 3: Asia and EM ex-Asia Are Structurally Different Asset Classes: Sovereign Quality and Developed Market Composition Tell the True Story¹¹

The sector composition sharpens this picture further. Energy names contributed approximately 2.06% of the 8.34% combined return¹² generated by the EM IG and HY corporate index in 2025, roughly a quarter of total return from a single cyclical sector. PEMEX alone accounted for a third of energy sector returns¹³. Five of the top ten issuers by return contribution were energy names¹⁴: Aramco, Petrobras, Ecopetrol, Pertamina, QatarEnergy. What presents itself as diversified credit exposure is, under the surface, resembles more of a leveraged call on commodity cycles and a handful of sovereign-linked oil champions.

The long tail compounds this further. Below the large issuers lies a stretch of small-weight, structurally weaker sovereigns and corporates that provide the appearance of diversification without its deeper substance. The index barbells between a few quasi-developed credits at one end and genuine frontier risk at the other, with commodity beta threading through both. That is considerably more cyclical and more concentrated than meets the eye.

The high yield picture is equally stark. Strip Asia from EM HY and what remains is, in large part, a sovereign index in disguise. Roughly 60% of ex-Asia EM HY is government debt¹⁵, concentrated in Turkey, Brazil, Argentina, and frontier Africa. APAC HY, by contrast, is 81% corporate, spanning financials, industrials, gaming, and utilities across Japan, India, Australia, and Macau¹⁶. These two pools of capital require entirely different analytical frameworks, respond to different macro drivers, and produce different return patterns. Filing them under the same label would be missing the forest through the trees.

Asia liquid credit, surveyed on its own terms, tells a different story entirely.

The weighted-average rating sits comfortably above the EM benchmark. There is no PEMEX equivalent, no single issuer carrying the concentrated weight of an entire sector’s return attribution. The sovereign linkage that defines roughly 70% of the asset class is structural support rather than structural risk. Quasi-sovereigns and state-backed financials in Japan, Korea, Singapore, and Australia are a categorically different proposition from commodity-exposed national champions in Latin America or the Gulf.

EXHIBIT 4: Similar Return, Meaningfully Better Ride: APAC IG Delivers Without the EM Volatility Premium¹⁷

Within that universe, several pockets stand out for their quality and their relative value. Chinese TMT, the large-cap technology, media, and telecom names with global integration and significant net cash reserves, offer credit profiles that remain robust through the new capital expenditure cycle. Australian banks, now included in APAC credit indices and carrying the technical tailwind that comes with index inclusion, offer yield premiums over U.S. peers alongside balance sheets that are, by any comparative measure, clean. Japanese financials, particularly TLAC capital issued by the largest life insurers, carry spreads more than 50 basis points above senior bonds¹⁸ of similar rating and duration. Quasi-sovereign bonds in the region, majority-owned by national governments and typically rated on par with sovereign ceilings, offer 75 to 100 basis points¹⁹ of additional spread, with particular value at the long end of the curve.

The supply/demand dynamics reinforce the picture. APAC IG has run three consecutive years of negative net supply²⁰. A market shrinking in issuance while growing in institutional demand from central banks, pension funds, and insurers is one where technical support is not an argument, but rather a tailwind of the landscape.

In the 2022 drawdown, Asia IG outperformed US IG by 5%²¹. Across virtually every major stress period since the GFC, Asia IG has demonstrated lower drawdowns than its U.S. counterpart. Lower beta, higher Sharpe ratios, shorter duration, wider spreads per unit of risk. These are the coordinates of an asset class that has, quietly and without much ceremony, grown into something the old map was never designed to show. A global allocator already holding EM credit gets genuine, structural diversification from a separate Asia allocation. The correlation between APAC HY and EM HY sits at 0.74²², meaningful but far from lockstep, and the developed-market anchor of Japan and Australia means Asia does not sell off when Argentina restructures or Turkey has a currency crisis.

EXHIBIT 5: Whitespace for Active Managers during Volatility in Asia Liquid Credit²³

Asia Liquid Credit Has Demonstrated Resilience in Macro Stress

The allocation question, then, is not whether Asia credit belongs in a portfolio. For most institutional investors it already does, folded inside an EM mandate, cross-subsidizing energy cyclicality and frontier volatility it has long since outgrown.

The question is whether it belongs there, or whether it deserves to be read on its own terms, with its own benchmark, its own mandate, and its own allocation logic.

The map has changed. The coastline is different now. And for allocators still navigating by the old one, the distance between the chart they trust and the territory they are actually sailing through is precisely where the opportunity lives.