Asia Credit: 7 Themes for 2023

Sandra Chow, CFA – Co-Head of Asia-Pacific Research
Lukas Chen – Analyst - Chinese Corporates

EXECUTIVE SUMMARY
  • Asia credit markets have started 2023 on a constructive note, with a flurry of new issues and optimism over China’s COVID reopening and government support measures for the property sector. China’s road to recovery will be bumpy, but we do see opportunities to add risk selectively in Asia credit, rotating out of defensive and expensive sectors such as utilities, and into higher beta investment grade names such as tech or consumer companies. The spread pickup for longer-dated bonds or perps also looks more attractive for some high quality credits now, given easing concerns over US interest rate volatility.
  • We outline 7 themes that could shape Asia credit this year. These include: 1) China’s zero-COVID exit; 2) Perpetual bonds; 3) Tight new issuance; 4) China property and the “Fear of Missing Out”; 5) Rising rates; 6) More defaults; 7) Commodities prices and China’s reopening.
  • Our Asia research team published individual sector outlooks at the end of 2022, presenting our views on industries including financials , technology, energy, metals & mining, LGFVs, utilities, energy, telecoms, metals & mining, consumer goods and autos.
7 THEMES FOR 2023
The Grand Opening: China Exits Zero-COVID

China has rapidly removed COVID restrictions since November 2021, sparking high hopes of an economic rebound. The Asia ex-Japan $ investment grade index tightened by 37 bp from the start of November to year end, while the high yield index rallied by 512 bp. Have the markets got ahead of themselves? The road to reopening is likely to be bumpy: press reports claim COVID cases have surged the near-term operating environment could remain tough, especially for smaller and weaker companies, which in turn could translate into more credit stress and non-performing loans.

That said, the Chinese $ bond universe is dominated by state-owned enterprises and larger, relatively well-capitalised private companies, which are better positioned than most to weather these COVID disruptions. As such, within China $ credit, we are comfortable rotating out of defensive but expensive industries such as utilities (mainly rated single-A) and into higher beta investment grade sectors (mainly rated BBB) such as tech or consumer products, which should perform well when business activity eventually returns to normal.

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