Consider adding high-yielding assets in Asia in case of a possible Fed interest rate cut

Speculation of an imminent rate cut by the U.S. Federal Reserve has generated investor enthusiasm for high quality debt securities through 2023, but the Fed is moving more slowly than expected. The high yield bond market outperformed the investment grade bond market globally in 2023, and we believe this trend could continue into 2024 due to continued volatility in inflation expectations and the possibility of a soft landing by the United States.

The Asian high income bond market, as represented by the KraneShares Asia Pacific High Income Bond ETF (ticker: KHYB), currently offers an average yield to maturity of 10.99%, compared to the Bloomberg Global High Income Bond Index at 8.45%. We believe the Asian high yield bond market will continue to benefit from relatively low interest rate risks, improved credit quality, reduced exposure to China's real estate market and economic growth in Asia for the remainder of 2024.

With interest rates above 5% for the first time in two decades, the 60/40 portfolio is once again becoming attractive to investors looking for smart and timely bond investments. As bond markets took a pullback in 2023, many investors piled into investment-grade bonds, risking the urgency to bet that the U.S. Federal Reserve would quickly cut interest rates in 2024. However, the central bank did not move as quickly as traders had hoped, and we have seen a pullback in high level investments in 2024. We believe investors are paying too much attention to interest rate risk, while attention should be paid to credit risk as well. High yield bonds outperformed in 2023, outperforming the broad global bond market. We believe the same may be true in 2024 due to continued volatility in inflation expectations and the possibility of a soft landing in the United States.

With valued undervalued credit risk and low interest rate risk, we believe Asia high yield marketing yield could outperform high grade investments in the US and developed economies in 2024. The Asia Pacific region currently offers a better value proposition than most global high yield bond markets. This is due to an active sell-off in 2022 due to real estate issues in China that are only now beginning to settle, strong corporate and economic fundamentals pointing to a recovery in various economies and industries, and exposure to economies that may cut rates sooner than the U.S. Federal Reserve. Investors can easily access the Asian high yield bond market through KHYB, which is actively managed by Nikko Asset Management, a leader in Asian fixed income with over 30 years of market experience. Please click here to read Nikko's latest commentary on the Asian fixed income markets.

Asian high-yield bonds, as represented by the KraneShares Asia-Pacific High-Income Bond ETF (ticker: KHYB), have significantly lower average durations than the emerging markets and the United States, meaning their sensitivity to interest rate changes is much less. This is an ongoing phenomenon due to the region's cultural preference for short-term borrowing. Nevertheless, corporate default rates in Asia are expected to decline in 2024. This can be attributed primarily to the exit from the real estate construction market and improving economic fundamentals in the region. Despite lower duration and rapidly declining default rates, the Asia-Pacific high yield bond market, represented by KHYB, currently offers additional yield compared to global high yield bond markets.

In January, a Hong Kong court ordered former mega-developer Evergrande to liquidate its assets outside China. We believe this is a positive signal that the story of the decline of over-indebted Chinese real estate developers is finally coming to an end.

According to Nikko Asset Management, fundamental data continues to support Asian credit. We believe the strong performance of Southeast Asian equity markets could be complemented by strong bond performance in 2024 with currencies strengthening against the US dollar and economic growth that favors the respective sectors. Southeast Asian equity markets have performed well in 2023, especially India, which could lead to strengthening fixed income in 2024. The Indian equity market is benefiting from secular growth trends and improving infrastructure, business environment and quality of life. While the Indian equity rally has attracted attention in 2023, we believe Indian bonds, especially financial bonds, may offer a better proposition in 2024. The 2023 rally has not affected all sectors equally. According to analysts at HSBC HBA, Indian banks offer a more favorable value-to-growth equity ratio after the 2023 rally. We believe Indian banks are benefiting from the economic boom and have strong balance sheets to support higher interest payments. Indian financial bonds are part of the portfolio with a 3% weighting as of January 31, 2024, while India's total weighting is over 20%. At the same time, Asian central banks may revise rates faster than the U.S. Federal Reserve, as many of them are seeing lower inflation and strong growth. Reserve

We believe 2024 could be a year of higher yields and less volatility for the Asian high yield bond market due to strong economic fundamentals in Asia, slowing inflation and strengthening currencies. We believe that the Asian high yield bond market has the potential to outperform high yield investments in the US and developed markets due to low valuations associated with the reassessment of credit risks arising from the downturn in China's real estate market. Moreover, we believe the Asian high yield bond market is an excellent potential component of a well-balanced bond portfolio, especially in the face of a revival of the 60/40 portfolio. For more information on KHYB, please visit kraneshares.com/khyb. * Diversification does not guarantee gains or protect against losses.