Tribeca: The investment space that has grown 500% and is ripe for alpha generation

Australian investors don’t often talk about Asian credit. In fact, there’s a misconception that this space is niche and exclusively dominated by China. It’s a missed opportunity and investors would do well to remember that Australian credit also falls firmly within the Asian credit investment universe. As do highly-rated offerings from Japan, Indonesia and India.

“The yields on offer in Asia are higher than what you see in other regions, just by virtue of having that emerging market label,” says Tribeca Investment Partner’s John Stover.

Stover sees a lot to like in this space, between the extraordinary growth of the investment universe, lower default rates historically and opportunities for mispricing.

In this episode of The Pitch, Stover discusses the key headwinds and tailwinds for Asian credit, how he invests, and what he believes the market is missing.

Edited transcript:

Why Asian credit? What do you love about investing in this space?

Stover: I’m from the US originally and moved to Singapore in 2010. Tribeca has had an office in Singapore since 2015. If you look at the market development over that period of time, the market size of Asian credit has grown by about 500% but the amount of dedicated, actively-managed capital focused on investing in this space has kept pace. Given that fast growth and obvious lack of actively managed capital, we see an incredible amount of market inefficiencies and alpha generation opportunities that we can take advantage of. Having invested across different markets and regions, I’ve always felt that Asian credit was the market that was most ripe for alpha generation, and that’s what we try to capture with this fund.

The yields on offer in Asia are higher than what you see in other regions, just by virtue of having that emerging market label. Obviously, there are some developed markets within that region as well, including Australia, which we do a lot of investing in as well. 

By virtue of having that emerging market label – which a lot of the countries in the region are – they trade at higher yields for the same credit quality relative to developed markets. That’s despite having lower default rates historically. 

That’s a real mispricing we try to take advantage of with this strategy.

What are some of the key headwinds and tailwinds you’re seeing across the Asian credit universe?

Stover: It’s a real mix in terms of what’s happening economically across different countries within Asia. A lot of people think China when they think Asia. The Chinese economy has been very challenged coming out of COVID. They’ve had a big property crisis. I think a lot of people paint Asia with this Chinese brush, but what’s happening is very different in other markets and other economies. Generally, when we say ‘trade war’, that’s obviously negative for within China, but it’s actually positive for what’s happening outside of China in the region. Typically, what we see is manufacturing factories move from China to Southeast Asia or India. We’ve seen Vietnam, Thailand and Indonesia all benefit from that. I think that is a headwind for what’s happening in China.

We are more focused on what’s happening outside of China for the portfolio. We’ve always been very focused on Southeast Asia, India, Australia, and different parts of smaller countries within Asia as well. We sometimes forget this sitting in Singapore because we’re living this day to day, but from the outside looking into the region, a lot of people look at China and think of that as a headwind. We think it’s a tailwind for a lot of the companies in our portfolio based outside of China.

The rate cycle has been another interesting thing over the past 12-24 months. We saw rates in the US go from zero to 5.5% in 18 months, which was the fastest increase ever. For fixed coupon bonds – which is predominantly what we invest in for the portfolio – that’s a big negative when rates rise that quickly. Over the past six months, rates have topped out in the US – the five-10 year topped out close to 5% towards the end of last year. That’s fallen from 5% to about 4.3% right now. We also see rate cuts happening on the horizon towards the end of this year. That headwind that we’ve seen over the past 12-24 months is turning into a tailwind that is going to be really positive for fixed rate debt.

How is this influencing where you’re investing or where you’re avoiding?

Stover: We’re very light on China. That’s less than 10% of the portfolio. We’ve had higher allocations towards India, Indonesia and Australia.

India has a really strong structural growth story and great demographics. It’s much more politically stable than it has been in the past. A lot of people have seen the election coming up later this year as the biggest risk, but we’ve seen some wins in the state elections for BJP, and we think that is a strong precursor to what’s going to happen in the national election. That structural growth story will continue and there are a lot of opportunities there.

Indonesia is another big overweight for us that we’ve had over the past 1-2 years. There’s a really fascinating story happening there where traditionally it has been a natural resources exporter, and they’re keeping a lot of those resources now within the country, moving increasingly downstream and starting to produce things like electric batteries to go in electric vehicles. We think it has a really strong demographic story as well.

We’ve always done a lot in Australia. Tribeca has Australian heritage and the market is moving towards us right now. What I mean by that is there’s a new index called the JP Morgan Asia Pacific Credit Index – before it was just the JP Morgan Asia Credit Index – and the new index includes Australia and Japan. The market is going to move more towards what we are doing, and I think we are going to see increased inflows into Australian credit by virtue of that.

Is there anything you think the market has missed or hasn’t fully appreciated when it comes to Asian credit?

Stover: It is the dynamic that I talked about for the difference between what is happening economically and what is happening in markets for China versus the rest of the region. Generally when a trade war kicks off, that’s actually a negative for China but a positive for the rest of the region. If you look at PMIs in Asia ex-China, they’re the highest in the world. Higher relative to what you see in the US and higher than what you see in Europe.

I think that’s a nuance that people don’t pick up on. From a markets’ perspective when people outside of the region are looking in, when they think negatively of China, they just sell their entire Asian exposure. Often that is a negative for market prices in Asia, excluding China, but it’s a great opportunity. What we look for as an investor are opportunities that are mispriced. If companies are doing better economically because of a trade war but the market prices are going down, that’s an amazing opportunity for us and something we are going to take advantage of in the next 6-12 months. It’s certainly something we have in the past.

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.