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Asian Fixed Income 2022 Midyear Outlook

Venn Saltirov, Portfolio Manager and ESG Investment Lead for Asia Credit, BlackRock

We believe it’s important for income investors to have a quality bias without taking on excessive duration risk.

Central banks today are faced with the difficult task of tamping down runaway inflation while minimizing the economic impact of raising rates. 

Overall, we think Asia credit sits at a sweet spot.

It offers average investment grade credit exposure, attractive yields and a shorter duration versus global investment grade credit.

In addition, Asian credit benefits from the strong presence of sovereign and quasi-sovereign issuers in the market with resilient fundamentals against any potential economic slowdown.

Asian fixed income strategies with an ESG overlay have proven to be more defensive in recent market volatility.

We have a strong conviction on the influence of ESG factors in Asian Credit and believe that investing through an ESG lens adds a positive layer to the investment process.

What is your outlook on China for the rest of 2022

Yii Hui Wong, Portfolio Manager, China Fixed Income, BlackRock

As China gradually opens up from lockdowns, we expect investor sentiment to turn more positive in the second half. 

China credit remains our top pick, especially onshore CNY credit.

It serves as an effective diversifier in a global portfolio and has benefited from the country’s stable inflation levels and supportive policies.

Given low inflation in China, ambitious growth targets and supportive statements made by multiple top authorities, we think monetary policy will remain accommodative.

Investors benefits from 2 layers of diversification when investing in China bonds.

Firstly, CNY credit has seen positive performance and outperformed other key global asset classes across recent periods of major global market shocks. It has proven to be a powerful tool to build resilience in a global portfolio.

Secondly, the low correlation between onshore CNY and offshore China USD credit market allows us to reduce portfolio volatilities and generate alpha through dynamic asset allocation.

China continues to offer attractive yields at low duration.

Our ability to dynamically invest across onshore and offshore credits allow us to capture dislocation opportunities to maximize yields without introducing extra credit risks.

Multi-Asset 2022 Midyear Outlook

SUPERS: What’s happened this year to date?

2022 has proven to be one of the most challenging periods for investors on record. Alongside a bear market in global stocks, core bonds are having their worst start to a year ever.

The catalysts for such negative markets are now abundantly clear. Central banks trying to contain multi-decade highs in inflation alongside growing recession risks have been the main drivers.

The areas of markets that have been hit the hardest are those that also benefited the most from easy central bank policies, like longer duration treasuries and growth stocks, but also more speculative areas like cryptocurrencies and non-profitable technology companies. On the other hand, commodity related assets, value-oriented stocks, and floating rate bonds have all held up much better.

SUPERS: How are you positioned for the current environment?

We are taking a slightly more defensive stance in our multi asset income strategies, given the level of uncertainty in today’s markets. Relative to the start of the year, we have a bit more in cash and government bonds, while holding slightly less in stocks and credit fixed income.

But we’ve maintained exposure to key income areas like high yield bonds, dividend stocks, and covered calls. Even if volatility persists, many of the areas we invest in now offer with much higher income and price appreciation potential.

SUPERS: What’s one trend you’re watching?

While we’re keeping a close eye on the risk of a recession, we believe inflation remains the key trend to watch. If inflation starts to show signs of moderating before we see a significant growth slowdown, it should allow the Fed to take a more measured approach to tightening policies. This should help markets recover.

The opposite is also true though. If growth slows more than expected while inflation stays elevated, fears of stagflation will likely lead to more downside in markets. This is not our base case, but it is a growing risk today.

SUPERS: What should investors do during volatile times?

These types of markets are difficult for all investor types, both big and small. It’s to be expected that many investors want to wait out the storm and go to cash. But we don’t think cash is a viable long-term strategy in normal times, let alone when inflation is as high as it is.

Rather, we think it’s important to remember a few key principles during volatile times:

Today’s lower prices implies higher income and return potential tomorrow Consider the repricing in bonds. For example, high yield bonds offer yields over 8% for only the 4^th time in the last decade. Or US stocks which are now trading below their 25-year average valuation.

Use volatility to your advantage In our funds, we can take advantage of higher volatility through single stock covered calls. This allows us to earn higher income as volatility rises.

Stay invested Over the last 20 years, 24 of 25 worst trading days for the S&P 500 were within one month of the 25 best trading days. And when you miss the best performing days, it greatly impairs your longer-term return potential.

SUPERS: If cash isn’t a viable long-term strategy, what is?For investors unsure when and where to invest, we advocate for three simple things:

1) Stay nimble and stay invested

2) Diversify your risks

3) When upside is harder to find in markets, focus on earning a reliable income stream on your investments

All features that serve as the foundation of our Multi-Asset Income strategies.