Executive summary
Executive summary
Asian credit enters 2026 supported by a constructive combination of technical factors and gradually improving fundamentals. Accommodative funding conditions across the region, disciplined issuance and sustained investor demand have underpinned the market’s recovery since late 2023. Valuations continue to offer a meaningful income cushion relative to global peers, while improving credit metrics have expanded the opportunity set for selective investors.
Looking ahead, the technical backdrop remains supportive. Net issuance remains modest, demand from non-benchmarked investors is resilient, and several Asian central banks retain flexibility to support domestic funding conditions. At the same time, credit fundamentals across much of the region have established, with lower default activity, improving balance sheets and a gradual shift from rating downgrades to upgrades.
In this environment, we believe Asian credit offers a compelling opportunity set for active investors in 2026. While risks remain, disciplined bottom-up research and issuer selection are likely to be key drivers of outcomes.
Introduction: Lessons from market recoveries
Introduction: Lessons from market recoveries
Following the sub-prime crisis, the S&P 500 required four years (March 2009 to March 2013) to recover its previous peak. Notably, returns during this recovery phase were particularly strong, with investors achieving an annualized return of 23%1, compared with 12%1 per annum in the subsequent period from April 2013 to November 2025. This illustrates how market cycles can reward early participation once conditions begin to stabilize.
A broadly comparable dynamic has been playing out in Asian USD credit markets. Since late 2023, the market has experienced a robust rebound. By the end of 2025, the Asian high yield and overall Asian credit market (IG/HY blended) delivered returns of 10.8%1 and 8.2%1 in USD, respectively, following strong performance in 2024 of 15.2%1 and 5.7%1, according to JP Morgan JACI non-investment grade and composite indices.
While past performance is not indicative of future results, historical patterns suggest that some of the most attractive opportunities in credit markets often emerge in the earlier stages of a recovery, particularly when fundamentals are improving and valuations remain supportive.
Why Asian credit in 2026?
Why Asian credit in 2026?
We believe Asian credit continues to offer a favorable starting point for selective allocation in 2026, supported by several structural and cyclical factors:
- Attractive relative yields compared with US and European credit markets
- Improving credit fundamentals, including low default rates, a shift toward rating upgrades and ample liquidity in local funding markets.
- Broad opportunity for credit alpha, driven by issuer dispersion and the importance of research-led selection.
Technicals: Supportive market dynamics
Technicals: Supportive market dynamics
Asian credit continues to benefit from favorable technical conditions. By the end of November 2025, the Asian high yield and over all Asian credit market yield 8.6% and 5.5% in USD, respectively, according to the JP Morgan JACI indices; both absolute yields and credit spreads remain wider and more attractive than global peers, providing an additional income buffer for investors.
By the end of November 2025, Asian high yield spreads are around 450 basis points, compared with 280 basis points for both US and European high yield. This level is in line with, or slightly above, the asset class’s pre-Covid historical range of 300–500 basis points, suggesting that valuations remain supportive relative to risk.
Figure 1: Asian High Yield is traded wider than global peers
Credit fundamentals: Resilience and gradual improvement
Credit fundamentals: Resilience and gradual improvement
Accommodative funding conditions
Lower oil prices, stronger regional currencies and easing inflationary pressures have allowed Asian central banks to adopt a more accommodative policy structure. This has supported local-currency funding markets, which have continued to deepen and mature, offering issuers greater access to longer-dated financing.
As a result, many Asian corporates have improved their financial flexibility, supporting balance-sheet resilience and contributing to a gradual uplift in overall credit quality across the region.
Default trends and ratings momentum
The Asian credit cycle has stabilized meaningfully. Default rates for the Asian high yield market are expected to remain below 1% by market value in 2026, with the overall Asian credit market defaults expected to remain below 0.1% by market value.
This reflects several underlying trends:
- Credit fundamentals have steadily improved since 2023, with rating upgrades outpacing downgrades (1.7x for high yield and 1.4x for investment grade over the past six months).
- China’s real estate sector has already undergone a significant credit cycle. In 2025, only one default occurred within the JACI non-investment grade index (Sunac, representing 0.5% of index weight), with limited broader market impact.
- While certain issuer like Vanke has faced periods of repayment uncertainty, it has small index weight, and policy support has so far helped contain broader contagion risks.
- The property sector now represents only 4% of Asian high yield1, and most issuers are surviving property developers.
- Higher tariffs have had limited direct impact on Asian credit markets, as many issuers have relatively low exposure to direct US exports.
Market structure
Asian high yield remains a relatively short-duration market, with an average duration of around three years. This shorter maturity profile provides greater visibility on default risk and allows investors to benefit from rolldown effects compared with longer-duration credit markets.
With only a limited number of higher-risk credits already trading at distressed levels, overall realized credit losses for the broader market are expected by the market to remain contained.
Figure 2: Asia’s IG rating upgrade trend has had a brief interruption
Figure 3: Asia’s HY rating trend has finally turned positive in 2025
Opportunities: Selectivity matters
Opportunities: Selectivity matters
We continue to identify attractive credit alpha opportunities across both traditional and new economy sectors in Asia. Over the past two years, market mispricing and improving fundamentals have created opportunities in several areas:
- Chinese property (selective): Our focus remains on issuers that have avoided defaults, maintained funding access and benefited from significant repricing from distressed levels, rather than a broad-based sector recovery.
- Chinese industrial and consumer sectors: After facing liquidity constraints during 2022–2023, many issuers have strengthened their financial profiles through asset disposals, operational improvements and improved domestic funding conditions. For example, in China onshore the 10-year Chinese government bond yield at around 1.8%1, remain well below US rates.
- Hong Kong property: While the sector has faced prolonged pressure driven by higher rates and economic uncertainty, certain residential segments have shown signs of stabilization. Improved refinancing conditions for selected issuers have created opportunities for fundamental credit investors.
- Commodity operators in southern Asia: Some issuers have used the recent commodity bull market and financial engineering to reduce debt and extend maturities.
- High yield sovereigns: Several sovereign issuers have strengthened fundamentals and continued their recovery from post-Covid distressed levels.
Figure 4: Competitive returns but lower volatilities from credits
Looking ahead, we expect opportunities to extend beyond traditional sectors. New economy segments – including AI-related technology and electric vehicles in China, Japan, and Korea – are becoming increasingly relevant for credit investors. Selected convertible bonds from investment grade-rated issuers may also offer an attractive way to participate, combining downside protection with upside participation.
In India, a potential easing of issuance regulations in foreign bond markets in 2026 could broaden access to USD bond markets for Indian corporates. This would enhance financial flexibility and expand the investable universe, potentially creating new opportunities for investors.
Positioning for 2026: Selectivity over beta
Positioning for 2026: Selectivity over beta
Over the past two years, Asian and China high yield credit have offered investors an alternative return profile to equities, characterized by lower observed volatility and supported by a broad range of issuer-specific opportunities across both traditional and emerging sectors.
Looking ahead, we believe the opportunity set in Asian credit will increasingly be defined by dispersion rather than broad market direction. Technical conditions remain supportive, while fundamentals across much of the region have stabilized, creating scope for active issuer selection to play a meaningful role in portfolio outcomes.
In this environment, a disciplined, research-driven approach, focused on balance sheet strength, funding access and maturity profiles, is likely to be critical. Rather than relying on broad market beta, we see value in targeting idiosyncratic opportunities across countries, sectors and capital structures, with a clear focus on risk management alongside income generation.
Past performance does not guarantee future result.
