The Asian corporate credit market is the size of the Australian equity market. Here’s what you need to know

The Asian corporate credit market is valued at $US1.8tr, while the broader Asian credit universe stands at $US34tr. To put this in perspective, the Australian equity market stands at the same value as the Asian corporate credit market alone.

The US bond market is valued at more than $51 trillion, according to the Bank for International Settlements but Asia is rapidly catching up.

“Actually, the Asian Pacific sovereign bond market is larger than the US, which is something that surprises a lot of people. The corporate bond market is about 30% of the size of the US. 

The market and GDP is growing more rapidly in Asia, and the corporate bond market as a percentage of GDP has a long way to catch up,” says John Stover, portfolio manager for Tribeca Investment Partners.

There’s a lot to like about the Asian credit universe.

It’s seen rapid growth in the past decade, benefits from great structural growth stories and includes a diverse mix of emerging and developed economies – think the likes of India and Vietnam on the emerging side, or Australia and Japan on the developed side.

In this episode of The Pitch, Stover explores the drivers behind the massive growth in the Asian credit universe, his preferred country exposures (Australia, India and Indonesia) and the mispricing opportunities he sees.

Edited transcript

Can you describe the Asian credit space?

Stover: A lot of people in Australia think it is a niche market, but Asian credit is actually a $US34tr market. Even just the corporate credit market is $US1.8tr. That’s about the size of the Australian equity market, for instance. It’s a big market for us to invest in and we look across the space. Predominantly, we’re using US dollar bonds, but we also look at local currency. There’s fixed rate debt, floating debt, corporate, sovereign and it’s pretty well diversified across the region. We do a lot of investing in India, Southeast Asia and Australia. Those are our major exposures. We also look at Japan and Korea, less so China.

The market has grown at quite an extraordinary pace since 2009. What has been the driver behind this?

Stover: The growth of the region, really.

If you look at Asia, it’s growing more rapidly economically than what you see in the rest of the world. At the same time, the corporate bond market is much smaller as a percentage of GDP relative to other regions.

Actually, the Asian Pacific sovereign bond market is larger than the US, which is something that surprises a lot of people. The corporate bond market is about 30% of the size of the US. The market and GDP is growing more rapidly in Asia, and the corporate bond market as a percentage of GDP has a long way to catch up. That’s really been the main driver of growth we’ve seen over the past 10-15 years.

Australia, Indonesia and India are bigger exposures in the portfolio than China. Why is this?

Stover: India and Indonesia are often overlooked by people outside of the region. These have two things that are important for the countries going forward economically and from a markets’ perspective.

Number one, they both have great demographics. Relative to some of the issues you’re seeing on demographics in Northern Asia, Japan and China; India and Indonesia are going to have stronger demographics over the next 5-10 years and they have growing middle-classes which are going to be a boost to the economy.

Number two, they are much more stable politically than they have been for the past few decades. Both have elections coming up. We don’t think the elections are going to be major movers one way or the other in terms of what is happening across the business landscape.

The policies the administrations are currently undertaking are going to continue even after the next election.

So, we think they have great demographics, politically stable and, in Asia, that is a big part of what you need for a country to do well economically.

Australia has also been an overlooked part of the market. You have Asian funds that historically have only done Asia and not Australia, then you have developed market funds that just do the US or Europe. Australia, in some cases, can be a bit of an orphan in the credit market so that has always been a source of alpha generation and opportunities for us because we have a strong team of analysts covering the companies day-to-day.

The benchmarking of new funds against the new JP Morgan Asia Pacific Credit Index is going to increase the flow of funds into Australian credit. That’s going to give a kicker on the returns for some of the bonds that we own today.

You look for mispricing in the market. What opportunities are you seeing at the moment?

Stover: Right now, Indian renewables are one of our larger exposures. They produce solar and wind power – very stable business profiles and have really strong major equity share holders.

Greenko (LON:GKO) is our biggest exposure in this space. It is majority owned by GIC, the Singapore Solvent Wealth Fund. These have moved from 3-4% yields a year ago to about 12-14% yields. They have come in a bit, but a really strong, safe carry right now at about 8-10% yields.

We also really like what’s happening in Indonesia. We have some exposure there in both the natural resources space and the property space. We’re seeing corporate buybacks as a thematic across the region. A lot of companies are using their free cashflow, or they are tapping into bank loans that are secured by their assets and buying back their cheap bonds.

We’ve been trying to get in front of companies doing buybacks of their own bonds, just like you would for a buyback of a stock on the market. That can move the market price of the bond up by 5,10 or 15 points.

Japan is also really interesting. Right now, it is undergoing a once in a lifetime corporate governance and shareholder return story. Companies are much more focused on corporate profits versus just increasing employment as they have been historically. That’s been a real positive for corporate profits and cash flows, and a positive for credit quality.

Learn more

The Tribeca Asia Credit strategy uses a long short approach to extract high-quality returns from the Asia Pacific corporate bond market. For further information, please visit their website.