Economic growth in Asia is expected to remain broadly stable in 2017. While there will be greater external uncertainties as well as country-specific challenges, Asian economies are, on balance, better equipped to deal with external pressures compared to a few years back. Furthermore, structural reforms in China, India, and Indonesia have continued to advance. While monetary easing may be on hold in most countries, the fiscal lever remains available to support domestic demand should the need arise.

The credit profile of Asian investment grade corporate issuers should remain broadly stable as companies have scaled back capital expenditure and mergers & acquisition (M&A) activities. However, high-yield issuers are expected to continue reporting elevated net leverage in 2017, with rising borrowing costs reversing most of the improvement in debt servicing ratio seen in 1H16. The Asia high-yield default rate is likely to worsen a little next year from the extremely low level in 2016, but is expected to remain manageable.

The key downside risks for 2017 include: a faster-than-expected pace of US rate hikes, contagion risks from further weakness in other EMs, worse-than-expected economic slowdown and greater financial system stress in China, and strong protectionist trade policies under the new Trump administration. Returns for Asian high-grade and high-yield are likely to be subdued in 2017, reflecting the challenges for fundamentals, market technicals and current valuation. For Asian high-grade credits, the expectation is that credit spreads will end 2017 at around 211bp or about 25bps wider, bringing spreads closer to the longer-term levels. Bond carry will dominate returns as the expected spread widening from rising UST yields will weigh on total returns. With this, the estimate for the total return for Asian high-grade bonds is around 2%. For Asian high-yield corporates, spreads in sectors with stronger fundamentals, such as Chinese property, are already trading at rich valuations. Asian high-yield spreads could end 2017 50bps wider from the current 465bps. The higher carry from high-yield could mitigate the potential spread widening and rise in risk-free rates. Asian high-yield is expected to return 3.4% in 2017...

Asian Credit Outlook 2017
38-page in-depth report