Vaccines vs the virus. Against all odds and our expectations, this year has been a very good one for Asian credit markets. We think 2021 will be just as good or even better. The widespread distribution of vaccines will put a spring in the step of the global economy and help to repair the damage caused by the coronavirus pandemic. Policymakers will continue to play their part by providing support as economies recover. We believe the most likely outcome is that China, followed by the US and the EU, will lead a synchronised global economic recovery that gains intensity as the year unfolds.

Follow the Fed. We believe the US Federal Reserve’s monetary guidance will probably be the single most powerful factor determining the performance of the Asian credit market in 2021. With the policy rate at close to zero throughout 2021 and probably well into 2022, the outlook is clearly constructive for Asian credit as it will prevent the US Treasury curve from steepening excessively. The prospects of increased certainty at the policy level should imply lower volatility, which we believe will amplify spread and total return1 performance. In short, we see little to stop a credit bull run in the Year of the Ox.

Our 2021e forecasts. Our 2021e total return forecasts are 5% for the iBoxx ADBI, 11.5% for AHBI-Corp and 5.4% for ADBI IG. We expect the best returns in 1Q21 due to spread compression, but we think 4Q21 will also be strong as tourist-related enterprises finally start to benefit from rising confidence among consumers and businesses. As of 4 December, the y-t-d total returns are 6% for the iBoxx ADBI, 5.4% for AHBI-Corp, and 6.9% for ADBI IG. We think gross bond issuance will rise in 2021 y-o-y but net issuance is set to pull back. See Chart 23 on page 13 for details. Prefer Chinese high-yielders. We think China’s high-yield issuers are set to be the big winners next year. The sweet spot is issuers in the 5-10% yield bucket that accounts for about 50% of the iBoxx AHBI-Corp index by weighting. We estimate that these issuers can generate average total returns of 12% from spread compression and coupon accrual over the course of 2021. Those looking to be more conservative could still generate around 7% by targeting issuers in the 4-5% yield bucket, in our view.