Seizing opportunities in Asia’s high-growth markets

As the global economy experiences varying growth outlooks in 2024 — with pressures from inflation and geopolitical tensions — what are investors’ perceptions of Asia’s high-growth markets?  

According to a straw poll at a session at APAC Sell-Side Forum — hosted by Bloomberg in Singapore in October — two-thirds of participants expressed bullish sentiments toward Asia dollar fixed-income credit following the recent rate cuts by the U.S. Federal Reserve. 

Around the same proportion believed technology sector in China could present potential relative value opportunities for bond investors, with around 30% pointing to the country’s state-owned enterprises possibly offering similar value. Under 10% indicated property sector, despite China’s push to bolster property market unveiled in September. 

Moreover, Asia’s emerging markets present diverse opportunities for global investors in segments like China’s high-yield bonds, while India’s strong economic growth momentum also holds promise. Rapid urbanization, growing consumer demand, and evolving economic policies define these markets, providing myriad investment opportunities across countries like China, India, Indonesia, Malaysia, South Korea, and Taiwan. 

Additionally, with further U.S. rate cuts on the cards, Asian central banks are expected to implement easing measures. This adjustment is expected to enhance the appeal of Asian fixed-income assets as the U.S. enters the second stage of rate cuts. 

Unlocking high-growth opportunities

As global investors look toward Asia’s emerging markets for economic growth and diversification across asset classes, sectors, and geographies, what strategies can unlock these opportunities while managing the region’s unique risks?

Key opportunities include: 

• High-yield credit markets: High-yield credit continues to attract investors across Asia. Increased issuance from non-bank financial companies in India reflects a trend toward funding diversification amid the regulatory moves in the sector, offering potential opportunities for investors amid India’s strong growth trajectory. Investors consider high-yield bonds from state-owned enterprises and utility companies in China as relatively undervalued. Utility sectors, such as gas, maintain consistent consumer demand, which supports investor confidence. India’s recent inclusion in a global bond index is attracting foreign investment and enhancing liquidity in Indian government bonds, supporting its appeal to investors.

• Investment-grade assets: Asia’s credit market is notably diverse but with a substantial focus on investment-grade assets, with spreads currently at multi-year lows. U.S. Treasury movements significantly drive returns, particularly as spreads for investment-grade credit remain historically tight. Many investors remain in short-term bills, awaiting further U.S. rate cuts. As rate cuts unfold, investors could extend the duration of their portfolios.

• Frontier markets: Asian high-yield assets remain attractively priced, especially in sectors within frontier markets like Sri Lanka and Pakistan, as well as Chinese high-yield credit, which shows resilience despite economic shifts. While the Chinese economy has changed consumer behavior and spending patterns, some companies are expected to thrive in this evolving economic landscape.

• Pacific Region: Investors are expanding their focus beyond traditional markets, adding more of the Pacific region to their indexes, mainly sub-investment-grade assets. This broader definition of Asia introduces more countries and offers a more comprehensive range of opportunities and a more diversified risk profile. 

• Local currency bonds: With expectations of further U.S. rate cuts, Asian currency bonds have gained appeal due to favorable FX hedging costs, particularly for investors seeking currency stability and income-focused opportunities. Although real interest rate differentials still place Asian government bond yields below U.S. Treasuries, anticipated Fed cuts create room for further easing by Asian central banks, setting a favorable environment for local currency bonds. As yield differentials improve, the region may enter a “sweet spot” for inflows, suggesting a positive medium-term outlook for Asian assets.

• Technology and high-yield bonds: China’s high-yield market presents opportunities in the technology sector, where convertible bonds issued by major tech firms in Hong Kong offer investors growth potential through equity exposure without direct stock investments.

• Structured and derivative products: Structured investment tools, including total return swaps, are gaining traction in Asia. They allow investors to access onshore markets in China through Hong Kong without needing a direct local presence. Additionally, callable credit-linked notes and other structured products like auto-callables have become favored by Asian investors aiming to improve yields while managing risks across various asset classes, such as fixed income and equities.

Balancing potential risks 

Despite these opportunities, investors must carefully navigate particular risks to achieve returns in Asia’s emerging markets. What are the main risks facing investors in Asia’s emerging markets, and how can these be navigated for high growth? 

Major risks include: 

• Interest rate and policy volatility: U.S. interest rate decisions significantly impact Asian markets, with anticipated rate cuts potentially easing conditions. However, if U.S. rate cuts are implemented aggressively, FX volatility could increase, affecting returns on Asian investments. FX hedging tools are crucial for managing returns in currencies sensitive to U.S. rates, such as Japan’s yen, South Korea’s won, Thailand’s baht, and Malaysia’s ringgit. 

• Geopolitical tensions: Political dynamics, particularly between the U.S. and China, add uncertainty to Asian markets. The U.S. elections and the potential for policy shifts could affect investor sentiment. 

• Consumer confidence and economic resilience: Consumer sentiment is a crucial factor in China, where the lingering risks in the property sector have weighed on confidence for several years. Although the property sector now represents only around 1% of the broad Asia credit index, it continues to reflect concerns over economic resilience. 

• Capital accessibility and liquidity risks: Specific high-yield sectors in Asia face liquidity challenges, which could restrict investors’ ability to enter and exit positions. Offshore sentiment around China’s Local Government Financing Vehicles (LGFVs) remains cautious, yet onshore confidence is high, with expectations for stable LGFV performance over the next few years. 

Given these risks, addressing the implications of FX volatility stemming from U.S. interest rate shifts is essential. Hedging strategies are crucial for managing currency risks across Asia. Investors can use derivatives, such as currency swaps, to protect against sudden fluctuations, particularly in FX-sensitive currencies like the Japanese yen, Korean won, Thai baht, and Malaysian ringgit. 

Furthermore, the real estate sector in China has seen a decline in its significance amid sustained weakness in the sector over the years. Most investors no longer require active exposure to this sector, as the broader Asia credit market has shifted away from dependence on Chinese real estate.  

The recovery of China’s property market now hinges on restoring consumer confidence, which is vital for stimulating demand. While policy measures have been introduced, simply reducing mortgage payments will not lead to immediate buying — improved consumer sentiment is necessary for a more substantial recovery. 

Asia’s emerging markets present a mix of opportunities and challenges. Investors can unlock potential across the region’s high-growth sectors by keeping abreast of sector-specific factors, such as the strength of China’s utility companies, and by leveraging financial instruments like OTC derivatives and total return swaps to maximize their investments. As markets evolve, remaining responsive to economic indicators and policy shifts will be essential for achieving strong returns in Asia’s fast-moving economic landscape. 

Insights in this article are based on the “Opportunities & Risks in Emerging Markets” panel which was part of the Bloomberg APAC Sell-Side Forum held in Singapore in October 2024.