Asian Investment Grade Bonds opportunities aplenty; Korean financial bonds on solid fundamentals

  • Asia's economic prospects is relatively brighter with lower inflation
  • South Korea's USD Investment Grade Bonds ("IG Bonds") tops Asia
  • South Korea's USD IG Bonds offer attractive yields and strong liquidity

Investment opportunities of Asian IG Bonds span across multiple markets and sectors. As of the end of August this year, total new issue volume of South Korea's USD IG Bonds tops Asia. Let's look at the allure of this asset class.

Asia IG Bonds opportunities aplenty

Inflation in most Asian nations is, in general, lower than that of Europe and the US, implying the region has less pressure to raise rates. Some countries have already paused rate hikes. South Korea, for instance, consumer prices have eased to 3.4% in August from a high of 6.3% in July last year. The country last hiked rates in January. Compared with other economies, South Korea's economic prospects seem to be relatively brighter.

In Asia, South Korea issued the most USD bonds this year, resulting in more reasonable valuations. BEA Union Investment prefers USD-denominated Investment Grade credits, due to the asset class' attractive yields and strong liquidity. It also comes with a plethora of investment choices, with issuers spanning across sectors such as financial, power, steel, auto and personal electronics devices. Among them, our top pick is financial Investment Grade papers, particularly those issued by banks, securities and credit card companies. In particular, the three- to five-year credits are often A or BBB rated, offering a yield of about 5-7%.

The issuer's ability to settle its debt obligation is key when it comes to deciding which bond to invest. South Korean banks have robust credit fundamentals and resilient balance sheets, allowing them to withstand potential domestic and external economic shock. According to Fitch Ratings, South Korean banks are regulated by stringent underwriting requirements, and their mortgages are well-collateralised, with a loan-to-value ratio standing at approximately 40%. Years before the implementation of policy tightening, South Korea already has in place rigorous measures regulating debt-to-asset ratios and FX policies, creating buffers for banks. In addition, South Korea will begin the implementation of Countercyclical Capital Buffer under the Basel III beginning next May, where financial institutions are required to set aside extra capital to enhance the banking system's resilience and reduce its structural risk from excess credit growth. The aforementioned policies have drastically reduced the odds of any substantial deterioration in the asset quality of South Korean banks.

Strong supply from South Korean USD bonds; valuations reasonable

As of end-August, South Korea issued the most USD-denominated IG Bonds in Asia, accounting for about 38% of the region's total supply. Like other Asian corporates, South Korean companies can issue bonds in US dollars or in local currency. Rather than issuing USD-denominated bonds, Asian corporates err towards issuing debts denominated in their local currencies for lower financing costs. But from the perspective of investors, the yields offered by USD-denominated bonds are more appealing. Although USD financing is more costly, companies, particularly international firms, that are sitting on sizable USD-denominated assets, will still opt for issuing debts in dollars since the benefits still outweigh the costs. This in turn, creates appealing opportunities for yield-chasing investors.

New Issuance of USD Bonds Breakdown in Asia (Jan – Aug 2023)

BEA Union Investment believes that South Korean USD-denominated IG Bonds not only offer attractive yields at reasonable valuations, another benefit is the strong liquidity the asset class has to offer. Many of those buying into USD bonds are foreign investors, who usually will trade more frequently, meaning it's considerably easier to find buyers when one needs to sell bonds in secondary markets. Bonds denominated in local currencies often pale in comparison in this regard.

Given the future interest rate trend, including Asian IG Bonds in one's portfolio will provide stable income with lower risk, and also diversify the sources of income, and have a well-founded approach.