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EM corporate debt, Japan stocks gain favour as the cycle turns

EM corporate debt offers positive real yields while Japan stocks are increasingly attractive as a proxy for global growth. Moreover, Asia is set to benefit from the global upturn in the next phase of the cycle.
EM corporate debt, Japan stocks gain favour as the cycle turns

Emerging market (EM) corporate debt and Japan stocks are expected to perform strongly while the broader economy in Asia will continue to improve.

The most appealing credit assets are in emerging markets, while Japan stocks are among the growth-sensitive assets with the most upside potential, said Mary Nicola, portfolio manager for global multi-asset at PineBridge Investments in Singapore.

Mary Nicola

“We particularly like EM corporate debt and are selective on high yield EM hard currency sovereigns. We view these as stable allocations because they offer positive real yields and have lagged other credit assets, which means they have further to run and provide an attractive yield contribution to return,” Nicola said.

Although growth rates are set to slow down over the coming nine to 18 months, credit assets may offer more attractive return potential relative to equities and commodities, she said.

PineBridge’s global equity approach has incorporated a focus on “following the vaccine” for signaling which growth-sensitive assets will outperform next in the cycle. In Asia, Japan equities stand out, as the country will likely benefit from the spillover of fiscally driven US growth without the need for higher taxes and regulation.

“Our equity convictions in Asia focus on Japan equities, which combine relatively attractive valuations with high beta to global growth, and we see big improvements in fundamentals ahead as vaccinations unfold,” she said.

While it continues to find Asian investment grade credit attractive, the fund house has reduced exposure to Chinese credits due to unfavourable risk compensation.

The normalisation of policy and growth slowdown in the intermediate term will also overshadow the China equities outlook, even though the asset is attractive in terms of valuation, she said.

On the other hand, fundamentals of renewable energy stocks should confirm their multi-year growth spurt. Asia is prioritising investment in renewables as countries set carbon neutrality goals.

“We remain focused on wind and solar stocks due to their price competitiveness and anticipated government funding for capacity buildouts,” Nicola said.


While Asia continues to battle pandemic woes, markets in the region stand to gain from the global upturn, thanks to their cyclical nature.

This has meant that the region is running on a two-speed recovery: externally oriented sectors are rebounding strongly while domestic-driven and other consumer-related sectors continue to lag, Nicola said.

Exports have led the recovery, benefiting economies like South Korea, Taiwan, and China, which trade in crucial capital goods, commodities, and electronics, she said.

Asia’s balance sheets are robust and will likely be unleashed once more people in the region are vaccinated and economies fully reopen. Until then, growth will be fueled by external sectors, but the worst is likely behind the region as a whole.

“Globally, we believe we’re entering a phase of sustained growth, improving fundamentals, and rising markets — albeit all at a slower pace. In other words, it’s an environment that generally rewards taking some risk, but to a lesser degree, and thus positioning in the right assets for this shift is critical,” she said.


Two factors will be key in the next phase of the cycle: inflation and corporate investments.

With the US consumer price index (CPI) rising to multi-decade highs, the path of inflation will be critical, as will be the size and duration of monetary and fiscal support after the economic reopenings.

“The key risk is that inflation exceeds expectations for longer or to a greater extent than expected, forcing central banks to overcorrect and potentially trigger a downturn. This will be crucial for the likes of India, which has often battled with inflationary pressures,” Nicola said.

In addition, EM central banks will be under pressure to keep up with the Federal Reserve when it comes to removing stimulus to maintain currency stability. Persistent and longer-lasting inflation will be a true test for central bank policy in the region as they strike the balance between supporting growth and managing inflation, she said.

The path of corporate investment is also very important in supporting growth in this next phase. The pandemic has accelerated multiple trends such as digitalisation and decarbonisation, and these are driving capital expenditure across multiple global sectors.

“We foresee a constructive reflationary regime with still-strong nominal GDP growth in the US, which should spillover into Asia. Continued supportive monetary and fiscal policy will likely happen, and we would be inclined to buy any dips,” Nicola said.

That said, while the Fed’s taper talk as a broad headwind, it could particularly lead to increased volatility across emerging markets, including Asia, she said.

For more viewpoints from PineBridge Investments' global economic and investment teams on what to expect for the rest of year, visit


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