Investors need to determine whether high returns outweigh market risk when investing in Asian high-yield corporates, according to Threadneedle Investments.
Asian high-yield corporates delivered high returns in 2012. However, Threadneedle has warned that this strong performance has made high-quality, high-yield credit more sensitive to treasury risk.
"To be clear, however, we think the market now has very little tolerance of high-quality, high-yield credits underperforming given their expensive pricing," Threadneedle's head of Asian fixed income, Clifford Lau, said.
"So long as they maintain their stable credit profiles, the inclination is to stay strategically invested in high-yield credits while the global market backdrop remains conductive."
With volatility still a concern in global financial markets, Threadneedle said investors should enjoy the 'risk on' market environment in the short term but continue to be vigilant over medium-term risks.
"We think the Asian fixed income market has the potential to generate a mid-single digit positive return in 2013, but we will place the emphasis more on active portfolio management, and be wary of chasing carry returns (from high yield) at this stage," Mr Lau said.
Asian high-grade corporates received a much higher core portfolio allocation by international investors in 2012, and with market volatility set to continue, Threadneedle Investments expects this trend also to continue over the next three months.
"Despite spreads having tightened a lot, peer comparisons show that Asian high-grade spreads still offer a 50-90 basis points pick-up compared to similarly rated bonds in the US," Mr Lau said.
"Our favourable outlook on Asian high-grade corporates is also an expression of our view that market volatility is going to be less detrimental to Asian high-grade compared to high yield, as people are still generally cautious about the heightened risk from the uncertain global growth outlook and political tensions in 2013."
