Astera In-House Views - July 2023

Asia Credit: Asia credit markets display positive signs amid China property headlines

July 2023 was a busy summer month with volatility in the Asia Credit Markets and with the China Property sector being on headlines once again. With one more developer defaulting and other China real estate names being sold-off due to the contagion risks, we expect that the investment sentiment on the sector will continue to be risk averse with more potential default candidates upcoming.

Apart from the China Property turmoil, Asia credits have developed positively with Japanese corporates becoming more popular for investors to go long. Credit spread of high beta corporate names were compressed on the bullish Japanese market view, due to recently stronger economic data of the country and hence more positive general investment sentiment. In Southeast Asia, Indian and Indonesian high yields were spaces where investors were looking to long credits with fundamental improvement, as they still offer value (high single digit to teens yield) versus the investment grades (mid-single digit yield).?

Moreover, Asia’s frontier markets also performed soundly with Pakistan and Sri Lanka receiving further support from the IMF, and Mongolia’s economic data improving by trade normalising with China. Overall, we maintain a positive view on the whole Asia Credit Market despite the bearish sentiment towards China risks.??

Macro Credit Events: Next steps for a maturing rate hike cycle

Meanwhile in the bigger picture, despite the Fed resuming their rate hike by 25 bps in July, inflation and other data such as employment have shown signals that we are nearing the end of the rate hike cycle. We foresee that we are approaching the end of the rate hike cycle with 1-2 more 25bps hikes within the year, and do not expect there to be any rate cuts in the next 12 months.?

Long-term rates should be relatively stabilized at the existing levels, unless there is further downgrade of the US Government by Fitch. However, there is potential risk that it will be further exaggerated by headline risks (such as UST auction results) which May trigger more sell-offs. Therefore, fundamentally sound credits with more than 8% current yield and limited price volatility will be a good choice to sit for carry, while most of the other credits have been repriced in this bear credit cycle and the chance of another big beta sweep is low.

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