Asia credit investors broadening their scope of investment

After many years of breakneck growth, Asia’s G3 bond issuance volumes have recently shifted down a gear. The current high rate environment is leading issuers to shift fund raising to local currency bond markets and loan markets and, in some cases, even forego debt capital raising activities.

The issuance slowdown in the traditional “core” Asia geographies, as defined in the region’s widely followed JPMorgan Asia Credit Index, has been sharp. In 2022 and 2023, Asia’s issuance of international bonds – i.e. bonds issued outside the issuer’s home jurisdiction – was USD 371 billion and USD 380 billion respectively. This is a significant decline from the level reached in 2021, when the market peaked with USD 620 billion of issuance¹.

This change in supply dynamics has prompted Asia’s credit investors to rethink what it means to invest in the region. Increasingly, they are allocating to markets that have not traditionally been considered part of the Asia mandate – a central theme at the HSBC 8th Annual Asia Credit Conference which was held in Hong Kong and Singapore in June.

One market that is seeing more interest from Asian investors is Australia.

Before the financial crisis in 2008, the country’s engagement with Asia was primarily limited to its four major banks selling relatively modest amounts of debt in the region.

These Australian lenders worked hard to develop their Asian investor base, meeting investors in the region regularly, opening orderbooks for their global USD transactions in Asia hours, and engaging investors in relevant local currency and private placement transactions. They now enjoy highly material orderbooks from the region, with about half of the demand for their USD global transactions now materialising before the U.S. opens.

Following on the groundwork laid by the banks, Australian corporates are leveraging Asian demand for their issues as well.

There are good reasons for Asian investors to take note of Australian fixed income, said Andrew Duncan, Head of Debt Capital Markets for Australia and New Zealand, HSBC: “We are a triple A jurisdiction, and we have a strong basis in accounting as well as sustainability.”

Over time, this relationship has developed into a mutually beneficial one. Australian issuers have realised the benefits of raising liquidity in Asia, achieving better diversification, size and pricing terms. While Asian investors are now looking to ramp up their exposures to this jurisdiction, improving the average ratings and also returns of their holdings. Furthermore, the logistics of marketing Australian transactions to Asia are straightforward: the region is relatively close to Australia and in the same time zone.

Looking further afield, the emerging Middle East-Asia corridor is seeing strong traction in the credit community. Asian investors are increasingly keen to add the region to their portfolios, especially Saudi Arabia where the ambitious Vision 2030 roadmap to diversify its economy is attracting global attention.

Asian activity in the Middle East’s credit market has picked up recently, especially among hedge funds and private wealth investors, said Arnaud Rambaud, Head of Global Debt Markets and Securities Financing, MENAT, HSBC.

“The Middle East and Asia have lots of similarities,” he said. “They both have a lot of government-related entities and there is strong local support across the yield curve. There is also only a four-hour difference in time zones.”

A confluence of positive factors is directing international investor interest to India. The country's GDP grew by 8.2% in 2023/24² fiscal year, making it the world's fastest growing major economy.

Positive factors influencing the economy include youthful demographics, substantial inflows of foreign direct investment, and rising service sector exports. There are also several market-specific developments that support investor sentiment towards India: the market was recently included in the JPMorgan GBI-EM Index and S&P Global Ratings raised the country’s sovereign outlook from ‘stable’ to ‘positive’.

“Put all these things together and there is definitely enthusiasm for India among international investors that will remain into the future,” said Hemant Lodha, Managing Director, Financing Solutions Group, HSBC.

Despite the attractive economic backdrop, it is still not clear whether India’s corporate sector will become significantly more active in the US dollar bond market in the near term. Capital expenditure remains muted among Indian corporates, and if they decide to raise capital they have a highly liquid local currency market offering competitive terms they can tap first. That said, there are hopes that spending in sectors such as infrastructure and utilities could boost issuance in the coming years.

The shortage of new supply in Asia’s bond market is a key concern for the region’s credit investors. But they are actively adapting to the current scarcity of assets by deploying new strategies within the region and further afield as well.

This includes casting a wider net to markets like Australia and the Middle East, reconsidering how to approach traditional core markets like China, and looking towards markets that could drive issuance over the medium term such as India.

Investors that are able to adapt to the new issuance environment as it evolves and develops in the coming years will thrive in the world’s most dynamic economic region.