JPMorgan Asset Sees Crowded Asia Credit as ‘a Bit Vulnerable’

Asia’s credit markets will continue to attract inflows from the rest of the world, but in the near-term the investment-grade area may be getting a bit fragile, according to JPMorgan Asset Management.

Many areas offer potential for strong returns given the higher yields on offer, but valuations may be getting stretched, according to Julio Callegari, lead portfolio manager for Asia local rates and FX. Caution has returned to Asian dollar bonds as spreads have widened about 4 basis points this week, set for the first weekly increase since April, according to a Bloomberg Barclays index.

“It’s becoming less compelling exactly because people have been coming into this particular market,” Callegari said of Asian credit. “It’s more crowded now, so it makes from a technical perspective the market a bit more vulnerable and that’s something I think investors should keep in mind.”

Central banks and governments have flooded the world with stimulus to counter the effects of the Covid-19 pandemic, which has helped prop up economies but also kept rates low in many places. A Bloomberg Barclays index shows there’s about $15.5 trillion of negative-yielding debt globally right now.

JPMorgan Asset Sees Crowded Asia Credit as ‘a Bit Vulnerable’

Here are some more of Callegari’s views:

  • Likes Chinese real estate because the country will continue to boost growth through infrastructure and urbanization, which will continue to support the market.
  • Sees opportunity in Indonesia because it’s a solid investment-grade country that still offers attractive yields and is relatively well-managed on the fiscal side.
  • India will become a more compelling story over time, as it benefits from relocation of the China supply chain, moves on a land-reform agenda and treatment of foreigners in the labor market.
  • “We are more cautious on the hard currency space in India, we prefer more cautious sectors like utilities and we are looking with a bias to re-engage in the local space.”
  • On the currency front, says his fund in the past has often had around 25% foreign exchange exposure and it’s now around 12% to 13%.
  • Thinks the appreciation of the Philippine peso may not be justified by fundamentals, as the economy is “collapsing” and when it stabilizes, there’s likely to be a resumption of imports.

©2020 Bloomberg L.P.

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