Capital IdeasTM

Investment insights from Capital Group

Fixed Income
Unearthing opportunities in Asian credit markets
Franz Lathuillerie
Fixed Income Investment Analyst Singapore
Debbie Leow
Fixed Income Investment Analyst
David Cheng
Investment Director

2022 has been a challenging year for fixed income, with global investment grade bonds down 14% over the past 12 months. Investment grade corporate bonds in Asia have outpaced US and global bonds, mainly due to their shorter duration.1 Asian high yield on the other hand, has been dragged down by the troubles in the Chinese real estate sector. Today’s higher starting yields, however, may present an attractive entry point for investors.

Investment Director David Cheng sat down with our analysts, Franz Lathuillerie and Debbie Leow, to discuss their outlooks for credit markets and how a deep focus on fundamentals can help unearth investment opportunities, even in this environment of rising inflation and interest rates.

Given the macroeconomic headwinds of a hawkish US Federal Reserve (Fed), elevated inflation and a potential global recession, what is your outlook for the corporate bond market?

It will be difficult to position portfolios over the next few months as uncertainty will likely remain high. The risk of recession is rising and credit spreads are already starting to reflect this. Central banks will likely continue prioritising the fight against inflation over a slowing economy. This level of co-ordinated tightening could put further pressure on spreads.

However, with yields higher, we think investment grade corporate bonds should be a lot more defensive and may benefit from yield/spread compression if the Fed pauses or pivots next year on its monetary policy stance. If we take a longer-term view (24 months), we start to see some valuations that are quite attractive. For an active manager, the market could present compelling opportunities to find value, though selectivity is key.

The Chinese real estate sector has been the pain point for Asian credit investors over the past year. What led to the downturn in the property market and what is your outlook on the sector?

The Chinese government has always been worried about a housing bubble. Elevated leverage among property developers and rising house prices prompted the government to take action. In August 2020, China imposed the “three red lines” policy on property developers; the policy aimed to improve the financial health of the real estate sector by reducing developers’ leverage, improving debt coverage, and increasing liquidity.

Most developers breached at least one red line and some breached all three. One by one, Chinese developers went into financial stress, from the most levered such as Evergrande to those that were previously thought of as safe credits, such as Country Garden and Longfor.

In China, many housing projects are still in the construction stage, and house prices have fallen due to defaults by developers. We remain cautious given that property sales remain weak. Repeated lockdowns also continue to weigh on the market.

For the sector to recover, the government would need to come up with a more comprehensive policy. We would need to see greater loosening of property policies, stronger support for consumption, as well as better regulatory transparency to restore market confidence. Currently, the government seems to be focussing on increasing funding for unfinished housing projects, but this alone is unlikely to help correct the underlying structural issues the sector is facing.

1. As at 31 August 2022. Indices: Bloomberg Global Corporate Bond Index Hedged in USD, JPMorgan Asia Credit Index (JACI) Investment Grade Corporate Index and Bloomberg US Corporate Bond Index, returns in USD. Sources: Bloomberg, JPMorgan


Risk factors you should consider before investing:

    • This material is not intended to provide investment advice or be considered a personal recommendation.
    • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
    • Past results are not a guide to future results.
    • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
    • Risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Franz Lathuillerie is a fixed income investment analyst at Capital Group with research responsibility for Asian financials in fixed income. He has 21 years of investment industry experience and has been with Capital Group for five years. Prior to joining Capital, Franz was CFO at AXA in Thailand and Indonesia. He holds an MBA from ESSEC Business School. He also holds the Chartered Global Management Accountant® designation and is a fellow of the Institute of Actuaries. Franz is based in Singapore.

Debbie Leow is a fixed income investment analyst at Capital Group with research responsibility for Asian non-financials credit. She has 15 years of investment industry experience and has been with Capital Group for four years. She holds a bachelor's degree in economics from the London School of Economics and Political Science. She also holds the Chartered Financial Analyst® designation. Debbie is based in Singapore.

David Cheng is a fixed income investment director at Capital Group. He has 22 years of industry experience and joined Capital Group this year. He holds bachelor's degrees in economics and applied science from University of Pennsylvania. He also holds the Chartered Financial Analyst® designation. David is based in Singapore.


Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.