Asian Bonds – Harnessing the Region’s Positive Growth Prospects

Although the global economic outlook remains uncertain, Asia’s robust fundamentals and prospects still outshine those of Europe and the US.

The International Monetary Fund (IMF) predicts that Asia, with a growth of 4.6%, will represent around 70% of the world’s economic expansion in 2023¹. As such, bond investors who choose to look through short-term challenges could capture potential opportunities in a region that has adeptly negotiated a way through COVID and its volatile aftermath.

Impressive Economic Performance Pre and Post Pandemic

Despite the high social cost of COVID, Asian economies mainly performed better than expected during the crisis. This is likely due to the sustained efforts of governments and regulators to improve the management of their respective economies and provide bulwarks against global shocks. The benefits of this are reflected in robust growth and relatively low inflation compared to more advanced economies. Indeed, the Asian Development Bank (ADB) expects region-wide inflation to fall to only 3.3% in 2024².

Asia’s currencies have also reaped the benefits of prudent economic management by avoiding the challenges experienced during previous global shocks.

Asia’s Banking Sector Proves Resilient

Asia’s banks have been relatively unaffected by turbulence in the banking sectors of Europe and the US. The ADB does not think that the problems experienced by mid-size US banks will trigger a more significant financial crisis³. The issues which toppled these lenders are not shared with most of the financial institutions in Asia, so any knock-on effects are limited.

The property sector in China has also been a historical concern for investors, but recent signs indicate that prices have stabilized and confidence is returning⁴.

Falling Energy Prices are Favorable for Most of the Region

The war in Ukraine led to soaring energy prices, but this spike has reversed, and prices have retreated to pre-conflict levels. In response to the war, Western nations placed a ban on energy imports from Russia, with this supply partially redirected to some Asian markets, particularly China and India, at a capped price below US$60⁵. Given most economies in the region are net energy importers, a fall in energy prices provides a further boost.

The conflict also led to higher prices for agricultural commodities, which benefited those markets that are significant exporters and helped reduce the negative impact of elevated energy prices. While the military conflict in Eastern Europe is ongoing, the risks to the downside remain. Still, if lower energy prices persist, it will provide a positive environment for most Asian economies.

Positive Demographic Tailwinds

While Japan and South Korea, for instance, have meager birth rates, other economies in Asia still have higher natality rates than Europe or the US, despite declines in recent years. A higher birth rate helps underpin economic growth, given that a larger population provides an expanded labor force and potential consumer goods and services. Conversely, the lower reproductive rates and ageing populations of advanced economies could act as a possible brake on their economic growth.

Of note, the United Nations (UN) recently estimated that the population of India had exceeded that of China⁶. However, over the longer term, India’s birth rate is expected to fall as it becomes wealthier⁷.

Looking ahead, a growing Indian and Chinese appetite for imports from the wider Asian region may offset the impact of lower demand from advanced economies⁸.

The Sectors to Watch

The technology sector will continue to grow in importance as the region’s economies continue to modernize. Specifically, China is promoting the growth of domestic technology companies. This is in response to US and European attempts to limit the export of advanced technology to China on national security concerns⁹.

Companies in the consumer segment will also likely benefit as Asia’s burgeoning middle class demands high-end goods or better education and healthcare services¹⁰.
Meanwhile, commodity exports from several markets will continue to provide an essential source of foreign currency.

From an issuance perspective, the region also has a buoyant green bond sector, with companies and sovereign issuers incorporating climate-related factors into their corporate operations and public policy. Helping this momentum are moves by Asia’s regulators to make ESG reporting obligatory and a desire by governments to variegate their capital markets.

Moderating Growth but the Region’s Economic Prospects Remain Bright

Therefore, the outlook for economic growth in Asia is positive, and while it may not be at the pace of past decades, it is likely to be stronger than the US and much of Europe.

The IMF expects real GDP growth for Emerging and Developing Asia will be 5.1% in 2024, while it anticipates that advanced economies will expand by only 1.4% ¹¹. This stark divergence makes the region appealing to investors seeking to diversify their exposure to global fixed-income markets.