Asian credit has performed well over the past three years, and despite the ongoing Iran conflict, the region’s governments and corporations remain better placed than in previous crises.

This is according to Nomura Asset Management’s Simon Tan, head of fixed income Singapore, who told FSA in an interview that corporate Asia “has the best financial health in years,” due to its improved credit fundamentals.

“With the China property crisis largely behind us, default rates are expected to continue to trend lower,” he said.

“The Asian region is better prepared for this event than in previous crises with more prudent government budgets, a higher level of central bank currency and strategic energy reserves.”

“Not all countries in the region are equally prepared, and investors will need to carefully manage their risk to issuers that are more exposed to the impact of higher energy prices.”

Asia’s economic drivers are also becoming more domestic and intra-regional driven, giving it a lower correlation to US and European credit cycles, Tan argued.

The region is also benefitting from higher levels of economic growth and therefore Tan expects “new interesting opportunities for investors to take advantage of as issuers look to tap capital markets to fund their next chapter of growth”.

“Many issuers are issuing more in local currencies which provide scarcity value to their dollar bonds,” he added.

“The technicals are also positively reinforced by continued growth in Asian banks, insurance, pension and central bank fixed income asset holdings, all of which historically has a bias to Asian assets.”

Current opportunities

The recent market volatility is also throwing up more opportunities within Asian credit markets, according to Tan, who pointed to Malaysia as one example.

“Malaysia continues to register strong growth of above 5% and being an energy exporter, is expected to be better placed than many other countries to weather a period of elevated energy prices,” he said. “We see several opportunities across investment grade and high yield bonds.”

Elsewhere, Tan favours some investment grade South Korean issues due to their valuations versus other issuers in the region.

In addition to South Korea, he also sees opportunities in high quality financial credits across Hong Kong, Taiwan, Singapore.

In the high yield space, he also sees opportunities in China, which he said is benefitting from “an improvement in investor risk sentiment due to the recent success of various issuers to address near term liquidity needs by raising alternative sources of funding and/or successful negotiations with current creditors to term out near term debt”.

Tan has been “monitoring Indonesia and Philippines issuers carefully” since mid-May as both countries are likely to face continued pressure under higher energy prices, he warned.

“Risks should be carefully managed for issuers in these countries that are unable to mitigate the impact of higher energy prices to their credit metrics,” he said.

In his view, elevated energy prices are “unlikely to return to previous levels soon” and therefore investors need to beware that some positions “have yet to fully reflect the impact of this risk”.

“Investing in US dollar-denominated bonds will reduce FX volatility, but we still have to carefully consider how higher energy cost flows through to issuers’ credit fundamentals,” he said.