Macroscope | The Asian credit market is looking less attractive to investors, but value can be gained with some finesse

Jim Veneau says despite instability in the euro zone, the strengthening US economy and an over-supply of Asian bonds have made the Asian fixed income space challenging

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A child rides a scooter at the Dalian Wanda Group Oriental Movie Metropolis film production hub in Qingdao, China, in April 2018. Investors have been unable to keep up with the glut of Chinese property bonds in the market. Photo: Bloomberg

Published: 12:01pm, 30 May 2018Updated: 10:36pm, 30 May 2018

Asian credit markets have begun to stabilise after a sharp sell-off, which began in mid-April and intensified during the first half of May. After a flat return in March, the JP Morgan Asian Credit Index (JACI) posted a -0.66 per cent return in April. It then fell a further 0.71 per cent through May 9 before rebounding. Through May 25, JACI’s return was modestly negative at -0.12 per cent.

The sudden and severe sell-off in April and early May has brought a return to relative value opportunities in Asian credit. What remains challenging is positioning for relative value without substantially changing overall portfolio risk levels. At a minimum, the spike in volatility argues for a continuation of cautious risk positioning at an overall portfolio level, but it also implies more opportunities for active portfolio management to generate performance with systematic and well-executed pair trades.

Despite negative shifts in investor sentiment over concerns over recent emerging market vulnerability centred on Turkey and now fresh euro zone concerns over Italy, a review of macro fundamentals shows some weakness but overall support for continued global growth.

Five Star Movement leader Luigi Di Maio speaks to supporters during a meeting in Naples, Italy, on May 29. Di Maio called for mass mobilisation in support of the party’s bid to impeach President Sergio Mattarella after Mattarella refused to approve populist leaders' choice of an economy minister. The political uncertainty does not bode well for Italy’s economic prospects or the stability of the euro zone. Photo: EPA-EFE

The preliminary release of first-quarter gross domestic product data in the major economies showed a mixed picture. European reports indicated a marked slowdown in activity relative to the fourth quarter of 2017. However, the bigger picture is that Europe’s growth rate remains healthy and the European Central Bank (ECB) is working towards communicating on how it exits quantitative easing and negative interest rates. While interest-rate expectations have eased a little, there should be some more concrete guidance from the ECB in June.