2024 Market Outlook: Progress seen across fundamental drivers; Asian bonds continue to attract

  • Interest rates have reached a plateau, the soft landing of the US economy may be deeper than expected, and Asia's performance is more optimistic
  • Asian bond yields continue to be attractive, and the macro and credits are improving
  • Asian High Yield bond market are expected to improve

Performance gap to narrow between Asian Investment Grade and High Yield bonds in 2024

Falling oil prices contributed to a steady decline in US core inflation, while weak property sales have yet to be reflected in consumer prices. Buoyed by investor expectation that the US will cut rates next year, US treasury yields took a sudden U-turn and plunged in November. Asian bond yields remain attractive, with macro and credit fundamentals holding up well. The size of new issuance of USD-denominated Asian bonds are estimated to come far below the combined volume of redemption and coupon payments, painting a favourable technical backdrop. This year, Asian Investment Grade bonds outshone their High Yield counterparts. But riding on the prospect of easing inflation and lower rates, our investment teams believe High Yield bonds will be able to play catch up in 2024, resulting in a more levelled performance between the two. Apart from positive macro drivers, improving credit quality of Asian High Yield bonds across sectors and markets is another reason why our teams believe a brighter future is in store for Asian High Yield bonds next year.

Continue to favour South Korean and Chinese TMT, financial Investment Grade bonds

Despite a weaker-than-expected economic recovery, we find select Chinese Investment Grade bonds are of excellent quality. With yields between 5.3% and 13%, these bonds are not to be overlooked. Some BBB rated banks and asset management companies (AMC) are trading at appealing valuations, with select issuers enjoying improved technical on widening investor base. Some also have rerating potential on the back of China's growth story. Our other top picks include technology, media and telecommunications (TMT), which see subsiding regulatory risks in addition to attractive valuations. Yields of some of these A-rated TMT bonds may even hit close to 7%. For diversification, we also favour select Investment Grade bonds issued by oil and gas as well as leasing companies.

The overall supply and demand balance of South Korean Investment Grade bonds remains stable. The cost difference between raising funds onshore and offshore is not too substantial. Furthermore, the volatility in the onshore bond market is higher than that of the USD-denominated bond market. These factors explain why South Korean companies are still willing to issue bonds in the US dollar; hence the steady pipeline.

Indonesian and Indian High Yield bonds offer ample choices; Macau gaming bonds attractive

Our investment teams believe the backdrop for Asian High Yield bonds could improve next year, driven by lofty yields, robust quality and the diverse choices available across different markets and sectors. Excluding China, the yield of Asian High Yield bonds hits a whopping 9%. Our investment teams particularly favour Indian and Indonesian High Yield bonds due to their wide range of durations and sectors.

India accounted for 30% of Asia's High Yield bond market in 2023, versus 13% in 2020, surpassing China to take the top spot. Considering supplies and corporates' favourable onshore fund raising accessibility, our teams remain positive on various sectors of Indian High Yield bonds, such as airport, steel, non-financial and renewable energy. Airport operators, for instance, see a rebound in passenger traffic back to pre-covid levels. Profitability is also on the increase. Better financial conditions prompted rating agencies to upgrade the ratings of select airport operators, which lend support to their bond performances.

Likewise, Indonesian corporates also have strong access to onshore funding. Commodities producers, for example, who are beneficiaries of lofty commodity prices early on, can manage their balance sheets efficiently given their ample cash on hand. Our teams also find Indonesian property bonds appealing. The local government is exempting the 11% housing VAT tax until June 2024 in a bid to boost Indonesia's housing market.

Among China's High Yield bonds, we will explore notes from the consumption and oil and gas sectors. Our teams remain vigilant towards the property sector, but will watch out for tactical opportunities among state-owned enterprise developers. Residential home sales were primarily driven by the secondary market, implying developers have yet to emerge from the doldrums. We are adopting a wait-and-see approach if any impact can be seen following the recent policy where banks are encouraged to provide unsecured loans to developers. At the end of the day, the recovery of the property market hinges on investor confidence, economic recovery and the labour market. As for Macau, our teams remain bullish on the city's gaming prospect. Riding on a rebound in tourism, profitability and cash flow of gaming operators should continuously improve.

In brief, we expect conditions should be ripe for rates to reverse course by mid-2024. US rates will also bode well for rates-sensitive High Yield bonds, which should close the performance gap between Investment Grade bonds and High Yield bonds, given the latter should see improvements in their credit quality. In early next year, South Korea and some Chinese Investment Grade bonds are still seen as top choices. As we enter a rate-cutting quarter, our team remains optimistic about High Yield bonds such as Macau gaming bonds and renewable energy in India.

Read More: 2024 Asian Equity Markets Outlook