Why Asian Credit Markets are a Smart Investment in 2022

Table of Contents

1. Introduction
2. Asian Central Banks and the Fed
3. Three Camps in Asia's Central Banks
4. Inflation and Monetary Policy Tightening in Asia
5. Asia Credit: Is it Still a Good Place to Seek Shelter?
6. Dollar vs Local Currency Exposure in Asia Credit
7. Chinese High Yield: Risks and Opportunities
8. Policy Shifts and the Chinese Property Sector
9. Duration and Investment Strategy in Developed Markets
10. Conclusion

Introduction

In this article, we will explore the Current economic landscape in Asia and analyze the relationship between Asian central banks and the Federal Reserve. We will also discuss the different camps within Asia's central banking system, their monetary policy actions, and the effect of inflation on these economies. Additionally, we will examine the credit markets in Asia and assess whether it is still a good place to seek shelter. Furthermore, we will Delve into the question of whether to have dollar or local currency exposure in Asia credit. We will also analyze the risks and opportunities in Chinese high yield bonds and the impact of policy shifts on the Chinese property sector. Finally, we will discuss investment strategy regarding duration in developed markets.

Asian Central Banks and the Fed

The relationship between Asian central banks and the Federal Reserve has become increasingly important due to surprising inflation prints. While some Asian central banks have been ahead of the Fed in monetary policy tightening, others are expected to follow suit. However, China's central bank is taking a different path of easing. This divergence in monetary policy tightening creates a lack of synchronization across the region. Nonetheless, the rising inflation in most Asian economies will lead to some tightening moves.

Three Camps in Asia's Central Banks

In Asia, there are three camps within the central banking system. The first camp comprises central banks that have been ahead of the Fed in terms of tightening monetary policy. The Second Camp consists of central banks that are likely to follow the Fed's moves. Lastly, the third camp involves China's central bank, which is pursuing a completely different path of easing. These three camps contribute to the lack of synchronization in monetary policy tightening across the region.

Inflation and Monetary Policy Tightening in Asia

Inflation levels have been ticking higher in most Asian economies, leading to a need for monetary policy tightening. While not all economies will experience tightening, a significant number of economies in the region are expected to tighten their monetary policies. The rising inflation will drive these tightening moves, indicating a shift towards a path of tightening in the region. However, the extent and timing of the tightening will vary across different economies.

Asia Credit: Is it Still a Good Place to Seek Shelter?

Despite the current market volatility and bond sell-off among sovereigns, Asia ex-China credit remains a favorable investment option. The combination of the Fed's policy normalization alongside reasonable economic growth suggests that the credit markets in Asia will still be well-placed in 2022. The low correlations with the rest of the world and the stability of the Chinese yuan add to the attractiveness of local currency exposure in Asia credit.

Dollar vs Local Currency Exposure in Asia Credit

The choice between dollar and local currency exposure in Asia credit depends on various factors. In the case of China, local currency exposure is currently preferred due to the direction of policy, low correlations, and the stability of the yuan. However, in the rest of the region, dollar-denominated credit remains a favorable option, especially in the first half of the year. As opportunities may arise in the local markets in the second half of the year, patience is advised when considering local currency exposure.

Chinese High Yield: Risks and Opportunities

The attitude towards Chinese high yield has undergone some changes in recent months. While structural issues and weak market growth still pose risks, the policy shifts in China have somewhat reduced short-term systemic risks. The risks associated with Chinese high yield bonds are now more balanced compared to the bearish sentiment of the past. Additionally, some policy shifts have resulted in more defaults, asset sales, and consolidations, favoring higher quality names in the sector.

Policy Shifts and the Chinese Property Sector

The recent short squeeze and subsequent market rally in the Chinese property sector have ignited discussions about increasing exposure to this sector. The risks associated with the Chinese property market are now more balanced than they were before, prompting investors to consider adding exposure. However, a selective approach is recommended, focusing on the quality perspective. While the sector has experienced a significant rally, spreads remain elevated, providing an opportunity for cautious investment.

Duration and Investment Strategy in Developed Markets

Considering the shifting policy environment, playing duration from the short side in developed markets is still favored. The expected rate hikes and quantitative tightening in the United States may lead to further steepening of the yield curve. In the near term, the path of least resistance for 10-year Treasuries is higher, indicating a tactical approach from the short side. However, a structural underweighting of duration in developed markets is advised.

Conclusion

In conclusion, the path of monetary policy tightening in Asia is not synchronized across the region. Rising inflation and surprising inflation prints are driving some economies towards tightening, while others are taking a different path. Despite market volatility, Asia ex-China credit remains a good place to seek shelter, with low correlations and stability in the Chinese yuan. The risks and opportunities in Chinese high yield have become more balanced, favoring higher quality names. The Chinese property sector may present investment opportunities, but caution and selectivity are required. Finally, playing duration from the short side in developed markets and maintaining a structural underweight is advised.