INVESTMENT INSIGHTS SERIES

Asian Credit: The Last Credit

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Introduction
Fixed income investors face a perplexing set of choices in todays environment.
Globally, approximately $5.5 trillion of bonds trade with negative yields and 23%
of gross domestic product come from countries with negative interest rates. In this
low-to-negative interest rate environment, Asia (ex. Japan) represents an out-ofbenchmark fixed income market that stands out as an oasis for investors thirsting for
yield without undue risk. More importantly, despite its significance, approximately $8.8
trillion in total and $800 billion in hard currency debt outstanding, Asian credit is a
largely overlooked sector that offers numerous benefits in terms of diversification and
alternative sources of returns.

READ INSIDE
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Asia (ex. Japan) investment grade credit represents an out-of-benchmark

fixed income market overlooked by U.S. investors

Growth of the Asian bond market has gone relatively unnoticed by

U.S. investors

Asia (ex. Japan) investment grade credit offers higher yield with lower
duration compared to the developed fixed income markets in the U.S.,
Western Europe and Japan

Nick Maroutsos,
Portfolio Manager

We examine the investment grade component of the JPMorgan

Asia Credit Index (JACI) in Exhibit 1 to demonstrate the relative
attractiveness of Asian credit. As of December 31, 2015, JACIs
investment grade sector yielded 4.3%, with duration of about
5 years. In comparison, the Barclays U.S. Credit Index yielded
3.5% with much longer duration of 7 years. In Asian investment
grade credit, investors are receiving about 80 bps of yield per
year of duration in a neutral to falling interest rate environment
versus 50 bps in the U.S. where the bias of the Federal Reserve
Board is to raise policy rates.

EXHIBIT 1: JACI IG DURATION AND YIELD-TO-MATURITY

(DECEMBER 31, 2005 DECEMBER 31, 2015)
JACI Investment Grade Yield-to-Maturity
JACI Investment Grade Duration

10%

The 97 98 Asian Financial Crisis

6
5.34

8%

5
Years

6%

This yield advantage has been consistent over time. As

shown in Exhibit 2, except for a brief moment in 2011, Asian
investment grade credit has consistently yielded higher than its
U.S. and European counterparts.

EXHIBIT 2: IG ASIAN OAS

(DECEMBER 31, 2009 DECEMBER 31, 2015)
Europe

Asia

320

bps

240
200
164
154

160

Source: Morgan Stanley as of December 31, 2015.

Dec-15

Dec-14

Dec-13

Dec-12

Dec-11

Dec-09

Dec-10

80
0

1. Issuance dominated by banks

2. Only a handful of state owned enterprises with little
borrowing needs

4. Ad-hoc capital controls and lack of harmonization

in tax policies

Source: The JPMorgan Asia Credit Index (JACI) as of December 31, 2015.

U.S.

Although painful at the time, the 97- 98 Asian debt crisis

forced Asian economies to rethink the role of fixed markets in
the regions future economic development. Back then, the Asian
bond market faced numerous headwinds:

3. Limited domestic demand due to underdeveloped

pension and insurance industries

Dec-15

Dec-14

Dec-13

Dec-12

Dec-11

Dec-10

Dec-05

Dec-09

3
Dec-08

2%
Dec-07

4
4.31%

Dec-06

4%

400

We agree with the markets demand for a liquidity risk premium

given the relative size, depth and maturity of the Asian market
vis--vis the larger, deeper and more mature U.S. and Western
European bond markets. The credit risk premium, on the
other hand, is arguably less justified against the backdrop of
a healthier macroeconomic environment and lower expected
corporate defaults. Lower sovereign debt-to-GDP levels,
consistent economic growth, substantially lower dependence
on commodities compared to other emerging regions, and
healthier banks make the case for the Asian credit risk premium
extremely compelling relative to those in the U.S. and Europe.
Despite the recent narrowing of the credit spread gap, we
believe the stickiness of the Asian credit risk premium is likely
to persist throughout 2016 and beyond.

5. Slow progress on corporate transparency and

protection of creditor rights
This crisis ultimately led to major bank restructurings and
heightened supervision through modernization of financial
regulations, but also to a deeper and more diversified
debt market.
In the last decade, we have seen Asian economies gain ground
and become a driving force behind global growth. While
developed economies face anemic growth prospects and
struggle with sovereign debt concerns, high unemployment, and
stagnating wages, Asia has been one of the few bright spots
where an alignment of a strong banking sector, high quality
sovereign balance sheets and healthy corporate fundamentals
exist. Given this backdrop of relative economic robustness, it
behooves U.S. investors to examine the relative attractiveness of
the Asian credit markets.
Aside from traditional bank loans, Asian corporations generally
access fixed income markets through G3 (dollar, euro and
yen) and local currency bond markets. Offshore investors tend
to favor hard currency debt given these issues are likely to be
more liquid and rated by at least one of the three major rating
agencies. As shown in Exhibit 3, gross new issuance of G3
bonds has grown about 14% per year. In 2016, gross new
issuance of hard currency bonds is expected to reach $134
billion. Asian financials are expected to account for nearly 40%

of the G3 bond issuances, followed by investment grade (37%)

and high yield (12%) corporate issuances.

EXHIBIT 3: GROSS NEW ISSUANCE OF ASIAN G3 BONDS

(DECEMBER 31, 2009 DECEMBER 31, 2016 ESTIMATED)

$U.S. Billions

$200

Sovereign
Financials

IG Corporates
HY Corporates
$16.2

Reliance on imported or external capital making Asian

corporates vulnerable to contagion from tight funding markets
that flow from liquidity stresses in developed economies

$48.5

Corporate disclosure and transparency

$55.4

The lack of precedent on bankruptcy proceedings, resulting

in creditor protection and recovery that are less tested
compared to developed countries

$100
$50 $8.1
$20.3
$14.3
$10.4

2016E

2015

2014

2013

2012

2011

2010

2009

$14.2

Source: JPMorgan, as of December 31, 2015.

While a large portion of the new debt issuance has come from
China, other countries such as South Korea, Indonesia, India,
Hong Kong, and Singapore have witnessed significant growth
in their G3 denominated debt issuance.
This exponential growth in the Asian bond market means a wider
set of opportunities for offshore investors, as the universe of
issuers broadens and liquidity deepens. From the credit quality
standpoint, Asian credit has much lower exposure to commodities.
More than 75% of the issuers in Asia are investment grade, while
the exposure to metals and mining is minor, and oil and gas related
corporates are often state owned enterprises (e.g., Petronas in
Malaysia, Oil and Gas Corporation in India, and PPP Exploration
and Production in Thailand). While not eliminating credit risk, in
our view, this sovereign backing provides an extra layer of credit
protection to these oil and gas related SOEs.

EXHIBIT 4: ASIAN BOND MARKET CREDIT RATINGS

(AS OF DECEMBER 31, 2015)
AAA - 0.2%
AA - 10.3%

A - 27.5%

Investing in Asian credit entails risk factors common to less

mature bond markets:
The ability of Asian corporates to continue to access the
funding markets easily

$150

$0

Risks

While these are some of the risks to be mindful of, we view the
risk of contagion lower than in the past due to the heterogeneity
of Asian countries. Furthermore, the risks related to disclosure
and recovery can be mitigated by focusing on companies with
a history of strong corporate governance or jurisdictions with
strong regulatory enforcement such as Hong Kong, Singapore,
Korea and Japan.

Conclusion
Lower yields in developed investment grade credit markets
(currently about 3.5% in the U.S. and 1.7% in Europe) have
prompted investors to search for a wider set of opportunities.
We believe that the Asia (ex. Japan) corporate space is largely
overlooked by U.S. investors yet can offer numerous benefits in
terms of diversification and alternative sources of returns.
As demonstrated in Exhibit 3, new issuance will continue
to grow, particularly in the non-financial investment grade
corporate sector. This will only aid in the development,
liquidity, demand and opportunity set for the region. From
a macroeconomic perspective, compelling demographics,
continued urbanization and further economic advancement,
a growing capital base, and supportive supply and demand
balance for fixed income instruments should support the
Asian debt market, increasingly making it an attractive
alternative or complement to lower yielding developed fixed
income markets.

NR - 8.9%
C - 0.5%
B - 7.1%
BB - 7.7%

BBB - 37.8%
Source: JPMorgan, Bloomberg and Asian Bonds online, as of
December 31, 2015.

About the Author

Nick Maroutsos
Nick Maroutsos is a portfolio manager and member of the Janus Global Macro Fixed Income leadership team. He is a founder
and Managing Director of Kapstream Capital, a Janus subsidiary. Prior to forming Kapstream in 2006, Mr. Maroutsos was a Vice
President and Account Manager at PIMCO Australia from 2002 to 2005, where he was responsible for the client servicing for over
90 clients. Additionally, he coordinated the development and launch of new strategies to the Australian market. Mr. Maroutsos joined
PIMCOs Newport Beach, California office in 1999 as an Associate. From 2001 to 2003, he served as a Senior Portfolio Analyst on
the global trading desk, where he conducted daily analysis of fixed income markets, implemented strategies for all global portfolios
and assisted with portfolio construction. Mr. Maroutsos has appeared in the media on numerous occasions as an expert on the global
bond market and is a regular speaker at conferences and seminars. Mr. Maroutsos holds a bachelor of arts in economics from the
University of California at San Diego and an MBA from the UCLA Anderson School of Management. He has 16 years of financial
industry experience.

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