Inflation concerns have caused investors to search for income with lower duration, and we believe Asia high yield delivers on this front.

As the world struggles with accelerating inflation, geopolitical conflict and tighter monetary policy in developed markets, investors are seeking yield and return potential in a broader array of fixed income assets. We believe Asia high yield delivers on this front. Asia represents a large and resilient part of the global economy; its economies have lower public debt ratios and stronger external balances than many other regions.

Asia high yield offers an attractive yield compared to U.S. and European high yield with a lower duration profile of less than three years to mitigate the impact of interest rate rises. Most of the Asia high yield universe is in sectors that are less sensitive to higher inflation. Property companies, and especially landlords, has tended to have pricing power in an inflationary environment. We believe the Financial sector will benefit from higher net interest margins driving higher overall profitability; most of the Utilities issuers in the asset class are renewables that will benefit as energy prices rise; Metal & Mining and Oil & Gas Upstream sectors will potentially benefit from increased inventories and bring forward purchases in anticipation of higher prices; other sectors like telecommunications will be less impacted as their services are indispensable.

Additionally, we are seeing pockets of opportunity across this space:

  1. Crossover credits. They include well-known sector leaders that operate in industries where more regulatory scrutiny has been seen recently. Many of them are well-managed companies with strong managements and balance sheets but which trade at dislocated prices, offering attractive risk-adjusted return potential. Once regulatory conditions have stabilized, they can focus back on growth.
  2. Unrated Asian bonds. Many Asian unrated issuers are financially strong companies with long operating histories. For example, some Hong Kong-based corporations that do not have external ratings offer attractive unrated bond yield premia compared to peers with similar credit quality.
  3. Transition to sustainability. In our view, the ability of companies to adopt a more sustainable profile will be a key to staying competitive in the face of structural inflationary headwinds tied to global goals for carbon reduction and social equity. Some examples include an Indian pioneer in renewable energy storage, real estate companies with improving green building standards, providers of inclusive micro-financing for rural economies and metals producers that focus on environmental improvement and carbon transition.