Asia Credit Mid-Year Outlook: A "Low-Fire, Low-Hire" Credit Market

Research evidence excerpt

Asia Credit Mid-Year Outlook: A "Low-Fire, Low-Hire" Credit Market

Asia IG Spread to Remain Tight in the Next 12 Months

• Much like the Fed’s “low-fire, low-hire” labor Asia IG spread risk is skewed towards widening

market, which reflects an uneasy equilibrium,

Historical Performance Current Spread Spread Fair Value Forecast Asia credit investors are facing a similar

predicament in a “negative net supply, negative

265 fund flows” asset class. That said, we do not think

this uneasy equilibrium will last. 240

• We see positive net supply, driven by cheaper

USD funding versus LC funding and Asia’s(bps) 190 industrial super-cycle, which should lift corporate

165 capex, pushing Asia IG spreads modestly wider.Spread • Our base case is for Asia IG spreads to widen to 140

IG 130bp 65bp. In addition, Fed rate cuts should support

115 Asia credit fund inflows, helping to keep Asia IGAsia 90 spreads tight.

65 65bp • Our bear case, in which Asia IG spreads widen to

55 50bp 130bp, reflects our economics team’s Scenario 3:

40 a global oil-led recession, where Asia growth

weakens significantly due to high oil prices.

Apr-13 Jan-14 Sep-14 Jun-15 Feb-16 Nov-16 Jul-17 Apr-18 Dec-18 Sep-19 May-20 Jan-21 Oct-21 Jul-22 Mar-23 Nov-23 Aug-24 Apr-25 Jan-26 Sep-26 Jun-27 • At the same time, our bull case, in which Asia IG

spreads tighten to 50bp, reflects our economists’ Our Asia IG spread and return forecasts for 1H27

Scenario 1: a US aggregate demand shock.

2Q27 Under this scenario, Fed rate hikes keep APAC

Asia IG Current/YTD Bull Base Bear credit net supply deeply negative and, in turn,

support tighter Asia IG spreads.

Spread Forecast 55 50 65 130

• Given that our Asia IG spread forecast is skewed

Excess Return Forecast N/A 0.5% -0.3% -3.2% towards wider spreads, we continue to believe