Invesco 2025 Investment Outlook: Asian Investment-Grade Credit Will Continue to Provide Strong Returns

According to the Zhitong Finance APP, Chris Lau, Senior Portfolio Manager of Fixed Income at Invesco, stated in the 2025 investment outlook that the policies of President-elect Trump may set the tone for all asset classes in 2025. However, central banks in Asian countries are expected to adopt policies that support exports and domestic demand. In the medium term, Invesco believes that U.S. inflation will hover around current levels. However, economic growth is expected to continue to slow down, providing a reasonable basis for the Federal Reserve to ease its cycle. Supported mainly by the trend of U.S. Treasury bonds, Asian investment-grade credit is expected to continue to provide strong returns in 2025.

Chris Lau mentioned that although the U.S. policy and interest rate path are unclear, stable fundamentals and strong technical factors should drive Asian credit spreads to remain at tight levels. The reduction in interest rate volatility in the first half of 2025 is expected to gradually attract capital inflows into the Asian investment-grade credit market. Invesco believes that Asian investment-grade credit spreads are unlikely to narrow significantly from current levels, but high overall yields should continue to benefit the market's development prospects in 2025.

Chris Lau pointed out that in recent months, global macro events have continued to dominate market performance. The Federal Reserve's unexpected 50 basis point rate cut at the September Federal Open Market Committee (FOMC) meeting, along with China's announcement of easing measures, has been favorable for Asian credit. However, the expected changes in the Federal Reserve's policy path and the uncertainties brought by the U.S. elections have significantly increased market volatility. Despite a massive sell-off of U.S. Treasuries, Asian investment-grade bonds have still recorded considerable returns year-to-date due to spreads being at historically low levels.

Due to strong recent U.S. macro data, the market expects the Federal Reserve's dovish stance may weaken. The election of Trump as president and the Republican Party's expected significant victory are likely to push U.S. interest rates higher, as Trump's main policy initiatives (tariffs, fiscal policy, immigration) will pose inflation risks and significantly widen the fiscal deficit. At the recent FOMC meeting in November, Federal Reserve Chairman Jerome Powell declined to comment on Trump's policy agenda and the appropriate response from the Federal Reserve. He reiterated that the Fed's policy decisions will depend on data, and given that the labor market and wage growth have cooled, and inflation is gradually returning to the Fed's target level, the current economic conditions still support further easing of policy.

Chris Lau stated that since Trump won the presidential election, the market has significantly lowered its expectations for rate cuts. After January, the increase in policy uncertainties may prompt the Federal Reserve to slow its pace of action. The federal funds futures market currently indicates that the cumulative rate cut by 2025 will be less than 100 basis points. Despite the sell-off of U.S. Treasuries, Asian investment-grade spreads continued to narrow in the fourth quarter. The JP Morgan Asia Credit Index (JACI) investment-grade spread narrowed from 97 basis points (as of August 16, 2024) by 27 basis points to 70 basis points (as of November 8, 2024). However, despite high valuations and increased interest rate volatility, Asian credit investors still tend to hold bonds. Given the robust fundamentals and low default rates, Asian credit remains attractive from an overall yield perspective Economic growth in emerging Asian markets remains robust. Although exports may remain strong in the next 1 or 2 quarters due to advance shipments, thereby keeping real GDP strong, U.S. tariffs could become a major downside risk affecting economic growth in 2025. Despite core inflation continuing to decline, a stronger dollar may pose resistance and limit the potential room for interest rate cuts in emerging Asian markets. Although emerging Asian economies face potential challenges overall, it is believed that the fundamental factors of Asian investment-grade corporate credit can remain stable due to the ongoing deleveraging trend and ample liquidity.

Even with an increase in new bond supply year-to-date, market technical factors continue to be favorable. Due to bond redemptions and coupon payments, negative net supply may persist. If U.S. interest rates are lowered later next year, the primary market is expected to become more active. Overall, the primary market indeed contains attractive relative value opportunities. Invesco expects that new bond supply will remain strong in 2025, driven by the financial sector, while new bond supply in the sovereign bond sector will continue to lag. The primary market is expected to remain a focus for investors, and the performance of new bonds and technical factors may drive market performance.

Chris Lau stated that relative to historical levels and global investment-grade credit, Asian investment-grade credit spreads are currently at tight levels. Key areas such as Asian financial bonds, secondary bank notes, and subordinated debt from insurance companies have high relative value. Following the recent sell-off in interest rates, the risk premium for long-term credit has begun to emerge. However, given potential interest rate volatility, Invesco continues to favor 5-7 year credit over long-term credit. In the medium term, Invesco maintains a constructive view on Chinese investment-grade credit and expects these companies to benefit from the easing policies and stimulus measures implemented in China.

Additionally, Chris Lau believes that driven by domestic purchasing willingness, the technical factors of Chinese investment-grade credit are expected to remain strong. Despite recent volatility, it is anticipated that the overall fluctuation of Asian investment-grade credit spreads in the first half of 2025 will not be significant. Asian investment-grade credit offers highly attractive yields (with low volatility returns between 5% and 5.20%). The pursuit of comprehensive yields will continue to drive investment funds into the market