We expect market returns to improve in the year ahead as the relative resilience of Asia Credit leads us to believe it could lead the recovery. Valuations are attractive, with decade-high index yields, and well above the long-term average. Volatility is likely to persist, and levels may cheapen further; but we should be approaching attractive entry points to gain exposure to an asset class that has demonstrated strong historical risk-adjusted returns and diversification properties.

We view Asia credit bonds as an asset class with sound long-term prospects predicated on strong regional economic growth. These bonds have an important part to play in fixed income portfolios, offering good diversification benefits as well as attractive risk-adjusted return profiles, access to strong economic growth potential, and the higher quality segment within EM fixed income. Despite challenging markets in recent months, these remain structural features of the asset class

China's weight in the JACI Diversified benchmark and in the Asia credit opportunity set are declining. We expect the market will skew towards more ex-China opportunities going forward. The record Asia issuance volumes in 2021 was driven by growth in non-China issuance which compensated for the drop in China issuance.

The property sector is a meaningful part of the China credit opportunity set, particularly the high yield segment. We expect to see some further volatility in the short term, followed by a longer period of consolidation. Our expectation is that China's property development sector will switch to a more utilitarian model, dominated more by state-owned developers, with private sector companies playing a smaller role. In the longer term, investors should welcome a healthier sector backdrop, with stronger balance sheets for those companies that survive the consolidation process.

The direction of U.S./Developed Market and Chinese monetary policy will continue to be the key drivers influencing Asian credit markets in 2022. The divergence in policy stance will be a supportive factor for Asian and Chinese credit, whereby buying opportunities may emerge in the months to come. Chinese regulators have demonstrated looser policy stance with a number of easing measures over recent months. Policymakers have enabled a cut in end borrowing rates reflected in lower loan prime rates, falling loan yields and lower deposit rates. They seek to implement easing measures to selective parts of the economy.

We expect there to be more of the same looking ahead, as we head toward the key 20th Party Congress later in the year.

The rest of the Asia credit asset class should remain resilient. Corporate fundamentals and credit metrics are generally healthy, but likely at peak levels as supply shortages and rising input prices are pressuring margins in places. We see value in the new issue market where an issuance drought due to investor concerns led to in concessions and more attractive prospects. The truncated supply in the new issue high yield market should benefit secondary prices when sentiment improves.

We believe a bottom-up, fundamental-driven approach can help to identify issuers with strong credit stories that will lead growth in the region. Integrating macro and ESG viewpoints in the investment process may also help us to select names that are likely to emerge stronger from the cycle. As the higher-quality segment of the Emerging Market fixed income universe, we continue to expect that Asia Credit will be able to deliver attractive risk-adjusted returns in the long-term.