Building Upon Our Roots: Asia Pacific’s Credit Transformation

Asia’s public and private credit markets present a rare opportunity for investors: a chance to invest in a region where growth remains resilient, demand for credit outstrips supply, and structural market inefficiencies play to the strengths of fundamental credit investors with local knowledge and relationships across the region.

The longer-term thesis for investing in Asia Pacific credit has a great deal to do with the macroeconomic evolution and complexity of the region. Despite China’s slowdown, Asia Pacific continues to grow at twice the pace of the U.S. and Europe. Moreover, we believe lower real yields should be a positive for valuations and a risk recalibration has helped to reshape the Asia Pacific landscape. For many years, real estate issuers played an outsized role in Asia Pacific’s liquid credit markets and were the primary driver of the market’s exponential growth. However, a wave of defaults amongst Chinese real estate developers catalyzed a wide reset in asset valuations that extended beyond the property sector, dramatically shifted the composition of the market, and eroded investor confidence. In our view, the sell-off created attractive entry points for investors and compelling relative value compared to the United States and Europe.

As we reflect upon the last 18 months of changes across the market, there is tremendous need for capital at a time when compelling relative value exists across the region. Though market volatility persists and higher interest rates continue to be digested, there remain sound issuers in need of near-term capital solutions. From a global relative value perspective, we believe valuations in the Asia Pacific market provide an attractive opportunity for diversification and total return in a portfolio with generally lower leverage levels (ex-China).

While regional nuances can contribute to complexity in investing across Asia Pacific, we believe that active management and a local presence are prerequisites to success. Each country has macro, political, and fiscal idiosyncrasies, so in our view, there is no “One-Asia”. In our 20-plus year track record investing in Asia Pacific, we have found that having deep connections in the region, an on-the-ground presence, and an active and selective investment approach that prioritizes principal protection and durable cash flows is invaluable for producing and executing on differentiated investment insights. The trust we have built further facilitates our investment processes enabling us to have a deep understanding of the local economies. Pairing our integrated resources with a diversified investment tool kit enables our team to be agile, proactive and establish conviction for our investors.

Asia Pacific continues to march to a different economic beat compared to both Europe and North America. Broadly, the economic outlook continues to gain momentum following the countries’ re-opening post COVID. We are energized by the opportunity this pickup in activity presents, including an uptick in business travel and tourism that has spurred positive economic activity across the region. Importantly, when the Fed begins its easing campaign, both lower interest rates and a weaker U.S. dollar could become additional tailwinds to growth.

For example, the economic backdrop and growth cycle within Japan is very different than what China is experiencing. Additionally, we view Southeast Asia as a diverse set of economies and underlying macro forces contributing to a broad investment opportunity set.

As we look deeper at the Asia Pacific markets, valuations and sentiment have not yet expressed the same optimism and thus we believe there is further upside to be priced in. The drawdowns in the Asia high yield (“HY”) and investment grade (“IG") markets persist and these markets are still well below their peak point from early 2020¹.

EXHIBIT 1: In the past 20 years, there has never been two back-to-back negative market years.

Asia High Yield and Investment Grade Yearly Returns

1. Market defined as ICE BofA Asian Dollar High Yield Corporate Index and ICE BofA Asian Dollar Investment Grade Corporate Index. Information as of January 31, 2024.