Marco Update

In April, markets experienced heightened volatility due to escalating trade tensions and rising concerns about a potential US recession and global growth slowdown. US Core PCE rose 2.6% YoY in March, down from 3% in February. Nonfarm payrolls increased by 177,000 in April, exceeding expectations, while the unemployment rate remained unchanged at 4.2%, reflecting a resilient labor market. The steep slowdown in US GDP to 0.3% in 1Q25 highlighted the front-loading effects of US import demand. Additionally, the IMF cut its global growth forecast by 0.5% to 2.8% in 2025, citing escalating trade tensions and policy uncertainty as major negative shocks.

In Europe, the disinflation process is well on track, leading the ECB to cut rates by 25 basis points. Meanwhile, skepticism surrounds China’s 5% GDP target for 2025 due to property sector strains. Stock prices have declined sharply, with the S&P 500 dropping 12% after the US officially announced reciprocal tariffs, but rebounding by a similar magnitude. On May 12, the US and China reached agreements to cut tariff rates by 115% with a 90-day pause, which is a better-than-expected outcome. US levies on most Chinese imports will be reduced to 30% from 145%, while Chinese duties on US goods will drop to 10% from 125%. It is anticipated that both sides will continue to strive for a final trade deal, which will dominate market attention in the coming months.

Credit Strategy and Portfolio Changes

Since April 2, the rapid repricing of recession risks and a slower global growth outlook led to a widening in Asian USD bond credit spreads. However, spreads have tightened significantly due to easing trade tensions, particularly after US paused reciprocal tariffs for 90 days. During this period, Asia Investment Grade (IG) and High Yield (HY) credit spreads widened but were partially offset by a decline in UST yields. Currently, yields for benchmark Asia IG and Asia HY bonds stand at 5.5% and 9.3%, respectively.

The quick deal on US-China tariffs is a positive surprise, reducing the material downside risk on growth that markets were concerned about earlier. This development should support risk sentiments in the near term. Additionally, as concerns about economic growth have eased, there has been a shift in rate cut expectations, now favoring a 25bp cut in September, compared to expectations of a cut as soon as July just last week.

We see limited first-order effects on Asian credits in our portfolio, as they are not directly exposed to tariff-related risks. The all-in yield remains attractive for Asia IG bonds, which have low underlying credit risks. We prefer the belly part of the curve, as volatility on the 10-year UST remains high, ranging from lows of 4% in early April to 4.47% now, and remains sensitive to an upside surprise in inflation. Overall, we remain nimble in our strategy, anticipating that the market may reprice tariff and growth risks after the 90-day period expires.

In our Asia HY portfolio, we have trimmed some high-beta bonds and raised cash for better opportunities. Given limited issuance, a low default rate, and improved sector diversification, we expect credit spreads to remain well-anchored. We believe that Asian central banks have the ability to pursue monetary easing measures to support the economy and engage in fiscal expansion to stimulate growth. Our credit selection themes remain focused on issuers demonstrating their ability to ride through the cycle and show business resilience.

^{The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable as of the date of presentation, but their accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.}

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