Asia Credit: Inflation Winners and Losers

Asian USD bond issuers are not only grappling with the impact of inflation in their domestic markets, but also with the second-order effects of rising US inflation. Which sectors or companies in the Asian USD bond universe will benefit?

Summary

How does higher inflation across the world shape our outlook for Asia credit? Broadly speaking, higher US interest rates and a stronger US$ do not bode well for emerging markets, making it harder for weaker sovereigns to repay and service their debts, as well as spurring investor fund flows out of emerging markets. Earlier this month, for instance, Sri Lanka announced it would temporarily suspend all payments on foreign debt, but that was a situation of the current government's own making ever since it cut taxes in November 19, when it came to power.

While every country we follow is facing some degree of inflationary pressure, China may be an outlier. Weak consumer demand and the government's ability to introduce swift regulatory measures could rein in price increases before they spiral out of control. Indeed, the key concern for China's policymakers at present seems to be sustaining economic growth rather than curbing inflation.

Within the Asia ex-Japan $ credit universe, we believe banks, upstream oil and gas producers, consumer staples and telecoms are the most resilient sectors to high inflation.

The most vulnerable sectors include energy refiners, power producers, airport operators and China property developers, in our view.