Beyond Misconceptions: Why Asia-Pacific Investment Grade is a Hidden Gem

For too long, Asia-Pacific (APAC) credit markets have been misunderstood—often perceived as inherently risky or merely an extension of emerging markets. In reality, APAC investment-grade (IG) credit has quietly evolved into a robust, sophisticated, and diversified asset class, anchored by the $2 trillion Asia dollar bond market, of which 90% is rated IG, a $1.8 trillion opportunity we feel is too big to ignore. With strong institutional participation and attractive risk-adjusted returns, we believe this often-overlooked asset class presents opportunities for alpha that go beyond conventional market assumptions.

Structural Tailwinds and Economic Resilience

APAC is not a monolith; its economies move at different paces, creating diversification benefits for global investors. Structural tailwinds such as rapid urbanization, technological innovation, and shifting consumption patterns are redefining the region’s economic landscape:

• Domestic consumption: Over 50% of GDP growth in key APAC markets is driven by internal demand, providing a stabilizing force in global economic cycles.
• Technological leadership: APAC accounts for 40% of global technology capital expenditures, making it a hub for innovation and growth.
• Demographic shifts: With a population of nearly 4.4 billion, the region’s growing middle class is fueling demand for technology, healthcare, infrastructure, and financial services.
• Asynchronous economic cycles: The economic cycle in APAC has moved at a different pace than those of the United States and Europe in recent years, providing investors with natural portfolio-hedging benefits against synchronized downturns in Western markets.

Dispelling the Risk Misconceptions

One of the most persistent myths about APAC credit markets is that it is volatile and prone to defaults. The data tell a different story:

• Zero direct defaults in APAC IG since the Global Financial Crisis (GFC): Contrary to common misconceptions, APAC IG credit markets have demonstrated strong resilience, with zero instances of direct default from investment-grade status since the GFC. While certain split-rating situations, particularly in the Chinese real estate sector, and cases such as Noble Group - have been classified as high-yield defaults, they were not recognized as IG defaults by major rating agencies such as S&P. This aligns with global default classification standards, where only abrupt credit events, such as the collapse of Silicon Valley Bank in 2023, are considered true IG defaults. Default rates for corporate bonds in APAC have been lower historically than those in other emerging markets, as credits there are typically supported by strong corporate balance sheets and local demand. Between 1993 and 2023, there were 133 corporate defaults in Asia, a small fraction of the 3,410 recorded globally from 1981-2023. Outside of the Chinese property sector, default rates in APAC high-yield markets have remained minimal, underscoring the region’s overall credit resilience. When looking at historical drawdowns, Asia IG has outperformed U.S. IG in all drawdown periods except for the APAC Financial Crisis in 1998 (Exhibit 1).
• Lower downgrade risk: Only ~1% of bonds in the BAML Asian Dollar Index IG component have fallen angel exposure. Historically, downgrades have been concentrated in a small part of the market: 80% of IG downgrades in 2023 occurred in three sectors: Chinese property, local government financing vehicles and asset management companies (Exhibit 2). The concentration is notable; however, it also demonstrates the skew of the market for those who are not close to it day-to-day.
• Shifting investor preference: APAC IG bonds have an average duration of 4.4 years, far shorter than the 7-year duration of U.S. IG, reducing interest rate sensitivity in a portfolio. On a spread/duration basis, we believe Asia IG is very attractive. While historically concentrated in the 3–5-year range, we are seeing increasing demand for 7-10-year bonds, reflecting growing confidence in the asset class and an increase in the number of insurers investing in the region who are looking for longer-duration assets with yield.
  
  

EXHIBIT 1

Asia IG has Historically Outperformed U.S. IG in Drawdowns except for the Asian Financial Crisis in 1998

EXHIBIT 2

Three Sectors Accounted for ~80% of the IG Downgrades in 2023

Why APAC Investment Grade?

While many investors assume that APAC IG credit is riskier than that of Western markets, the reality is far more nuanced. The credit quality of issuers in APAC is on par with those in the U.S., with nearly 90% of APAC IG debt rated A or BBB by S&P and Moody’s. Moreover, we believe the opportunity to capture additional yield and relative value is particularly attractive in today’s market environment:

• Higher yield potential: While index-level returns are comparable to U.S. IG, active management can generate an additional ~50-60 basis points (bps) of yield by leveraging manager alpha, inherent diversification, and relative value opportunities.
• Attractive risk-adjusted returns: APAC IG boasts lower beta and higher Sharpe ratios than U.S. IG, providing investors with risk-return efficiency (Exhibit 3).
• Resilience in volatility: APAC IG has outperformed U.S. IG in all recent major market drawdowns, except the 1998 APAC Financial Crisis. In the 2022 drawdown, APAC IG outperformed U.S. IG by 5%.
• Deepening liquidity: Growing allocations from central banks, pension funds, and insurance companies underscore the increasing credibility and depth of APAC IG markets.

EXHIBIT 3

Asia IG is Lower Beta, Higher Sharpe

The Case for Relative Value

Beyond its fundamental strengths, APAC IG presents compelling relative value opportunities, particularly in today’s shifting global landscape. In fact, APAC IG is increasingly trading in line with U.S. IG as global investors allocate more capital to dollar-denominated bonds.

• Monetary policy divergence: Diverging monetary policies can bolster the regional bond market. For example, China’s interest rate drop from 4% to 1.7%, has driven domestic investors offshore to seek higher yields in the APAC IG market.
• Strong sectoral opportunities: Japanese and Australian banks present particularly compelling relative value plays given their robust domestic funding backstops.
• Tightening supply dynamics: APAC IG has experienced three consecutive years of negative net supply, creating a supply-demand imbalance that supports tighter spreads and enhances relative value (Exhibit 4).
• Natural hedging benefits: APAC credit markets exhibit lower correlations with the U.S. and Europe, making them a valuable diversifier in multi-asset portfolios (Exhibit 5).

EXHIBIT 4

Spread/Duration by Rating Is Attractive

EXHIBIT 5

APAC IG Credit Correlations Are Lower than Those of the U.S. IG Market

What We Are Watching & What We Like Right Now

Within the APAC IG landscape, several themes stand out to us as particularly compelling, including Chinese TMT, Australian banks, Japanese financials, and quasi-sovereign bonds.

Chinese TMT : Tech, media, and telecom remain strong, globally integrated sectors.

• We believe large-cap corporations with leading status in global and/or regional markets, equipped with strong technological and operational expertise, should continue to outperform in the new capex cycle (Exhibit 6). The significant net cash reserves of these companies further support their solid credit profiles, providing additional downside protection.

EXHIBIT 6

Market Capitalization of Global Chinese Companies

• From our vantage point, there is attractive relative value embedded in particular situations that are not well understood by the market nor widely acknowledged. For example, Prosus (PRX.NA), Tencent’s 24% shareholder with a <1% LTV, trades >100bps wider than Tencent.

Australian Banks : Offering solid fundamentals with a yield premium over U.S. peers.

• We have a preference for the “Big 4” (i.e. ANZ Bank, Commonwealth Bank of Australia, National Australia Bank, and Westpac) and Macquarie Bank for their relatively clean balance sheets, solid fundamentals, and robust risk models.
• Tier 2 capital of these banks feature investor-friendly structures and low extension risk, presenting attractive deployment opportunities as more supply is expected this year and next.
• The Australian Banks are now included in APAC credit indices, providing strong technical support for the sector in 2025.

Japanese Financials: The fourth largest economy globally and second largest savings market in terms of life and annuity products.

• We currently favor Total Loss-Absorbing Capacity (“TLAC”) capital issued by the largest Japanese life insurers for its attractive risk premium ─ more than 50bps over senior bonds of a similar rating and duration.
  
• We also prefer senior bonds issued by the country’s largest diversified financial services groups, which trade the widest among APAC peers of comparable credit profiles.
  
• Like Australian banks, this sector is expected to benefit from strong technical support and onshore demand.

Quasi-Sovereign Bonds : Strong relative value, with an additional 75-100bps spread

• We are focused on national leaders in sectors such as oil and gas, utilities, and mining, which are majority owned by national governments. Their credit ratings are typically on par with the corresponding sovereign ratings, providing downside protection.
• We particularly like the attractive yield provided by the long end of the curve.

Avoiding Pitfalls: A Targeted Approach to Risk

While APAC IG offers significant opportunity, it is crucial to be selective. Strategies should focus on minimizing exposure to fallen angels and ensuring a diversified approach to avoid concentrated risks in any single economy or sector. Unlike the one-size-fits-all approach often applied to Western markets, successful investing in APAC requires a tailored strategy that accounts for each country’s unique macro, political, and fiscal landscape.

Investors seeking yield, diversification, and stability should not overlook APAC IG credit. With strong fundamentals, a track record of resilience, and an evolving market structure that is attracting global institutional capital, APAC IG offers an attractive proposition in today's uncertain investment environment. The key to success lies in an active, nuanced approach—one that recognizes the region’s diversity and embraces the opportunities it presents. Simply put, there is no “One Asia,” and investment strategies that acknowledge this complexity will be best positioned to generate real alpha.

REFERENCES
Data referenced from J.P. Morgan, Moody’s, S&P Global Market Intelligence, Fitch, Bank of America, Oxford Economics, Worldeconomics.com and International Monetary Fund.