Investors are missing an opportunity to generate returns by ignoring the investment-grade credit market in the Asia-Pacific region, according to KKR & Co.
The market holds a US$1.8 trillion opportunity that is “too big to ignore” and has evolved into a diversified and more risk-averse asset class, Tal Reback, a global credit and markets investment strategist, and Dengzhao Pan, KKR’s head of Asia liquid credit, wrote in an investor letter seen by Bloomberg News.
Investors often assume Asian credit markets are “volatile and prone to defaults,” they wrote, adding that’s one of the most “persistent myths” about the sector.
“There are misconceptions about Asia,” Pan said in an interview. “People need to look deeper at the numbers to overcome the inherent biases they may have.”
There have been zero defaults in the region’s high-grade credit market since the global financial crisis, according to KKR. From 1993 and 2023, there were 133 corporate defaults in Asia, versus the more than 3,000 recorded globally from 1981 to 2023. High-grade bonds in the Asia-Pacific region also have a shorter average duration than in the US, subjecting them to less interest-rate volatility within a portfolio.
The market offers a good complementary trade for US investors, Reback said in an interview, especially as volatility starts to creep into the market. US investment-grade spreads widened more than 10 basis points since Feb 19, before falling to 85 basis points Wednesday.
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“With all the mark-to-market whiplash in the US recently, those looking for diversified income can find pockets of relative value in Asia-Pacific,” Reback said.
AI exposure
KKR also recommends the region given its exposure to the world of artificial intelligence. Investors don’t have to sacrifice high-grade investing for access to these assets, according to the note.
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Particularly, the Chinese technology, media and telecommunications sectors are strong and “globally integrated,” according to the note. Companies such as Alibaba Group Holding and Tencent Holdings will likely continue to outperform and have significant cash reserves to hold up their credit profiles.
The alternative asset manager also sees opportunities in Australian banks and Japanese financial firms.
Investors should still be selective when it comes to the Asia-Pacific region and take each country’s “unique macro, political and fiscal landscape” into account, according to KKR.
But for Pan, the Asia-Pacific region offers access to alternative returns.
“If you’re a global asset manager, you need to think about not just relative value in the US, but need to consider relative value across the world,” Pan said.
