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Asian credit’s next evolution: introducing the JACI Asia Pacific Index

On March 16, 2023, J.P. Morgan announced that it’ll be introducing the new JACI Asia Pacific Index into the J.P. Morgan Asia Credit family of indexes. We discuss the implications for investors.

On March 16, 2023, J.P. Morgan announced that it’ll be introducing the new JACI Asia Pacific Index within the J.P. Morgan Asia Credit family of indexes. This followed consultations with over 38 investment managers and asset owners domiciled in Asia, Europe, and the United States who collectively manage around US$115 billion of assets and over 90% of the assets benchmarked to the J.P. Morgan Asia Credit Index (JACI) series.  

The JACI Asia Pacific Index, to be launched in the second quarter of 2023, expands the coverage of the existing JACI to include debt from Japan, Australia, New Zealand, and other Pacific countries. To be clear, the JACI Asia Pacific Index is a new index within the JACI family. It won’t affect the existing flagship JACI, which will continue to focus exclusively on Asia debt (excluding the debt of Japan, Australia, New Zealand, and other Pacific countries).    

Main differences between the JACI Asia Pacific and JACI indexes

The JACI Asia Pacific Index is expected to provide coverage of US$1,561.8 billion in corporate, quasisovereign, and sovereign debt across 648 issuers in 21 markets. In comparison, the JACI covers US$1,089.9 billion in debt across 555 issuers in 17 markets.¹ The average credit rating for the JACI Asia Pacific Index is marginally higher at A3/A-/BBB+ than the Baa1/A-/BBB+ (Moody’s/S&P/Fitch) average rating for the JACI.² JACI Asia Pacific Index’s duration is marginally lower at 4.40 years compared with the JACI’s duration of 4.51 years.³

1 Regional exposure: One of the key differences is the inclusion of Japan (19.6%), Australia (9.7%), and New Zealand (0.9%) bonds in the JACI Asia Pacific Index. Accordingly, other Asia regional weights will be lower relative to their JACI weights, led by Mainland China (from 40.4% to 28.6%), Hong Kong (12.3% to 8.5%), and South Korea (10.7% to 7.3%).

2 Sector exposure: Financials within the JACI Asia Pacific Index will be higher at 37.9% compared with 26.8% in the JACI, given the dominance of high-quality banks and diversified financials among Japan and Australia issuers. Meanwhile, sovereigns and real estate issuers should see the largest corresponding declines based on estimates. 

3 Credit quality: Compared with the JACI, single-A-rated issues within the JACI Asia Pacific Index will be 7.3% higher at 39.0%, while exposure to BBB-rated issues will be 6.5% lower at 34.9%. Most newly added issuers from Australia, New Zealand, and Japan are single-A-rated issuers. The decrease in BBB-rated issuers is mainly due to reduced exposure to Asian sovereign issuers such as Indonesia and the Philippines.

JACI Asia Pacific Index vs. JACI—top 10 regional weights
Chart comparing the difference in market-weightage between the JACI Asia Pacific Index and the J.P. Morgan Asia Credit Index. The chart shows that Mainland China’s weightage in the Asia Pacific Index is significantly lower relative to the J.P. Morgan Asia Credit Index. The new index also includes Japan, Australia credit issues, which weren’t included in the J.P. Morgan Asia Credit Index.

Source: J.P. Morgan, as of February 28, 2023. JACI Asia Pacific index country weights are estimates from J.P. Morgan based on the new index.

JACI Asia Pacific Index vs. JACI—sector weights
Chart comparing the difference in sector-weightage between the JACI Asia Pacific Index and the J.P. Morgan Asia Credit Index. The chart shows that the financial sector is more prominent in the Asia Pacific Index relative to the J.P. Morgan Asia Credit Index; however, the real estate sector’s weightage in the JACI Asia Pacific Index is slightly lower relative to the J.P. Morgan Asia Credit Index.

Source: J.P. Morgan, as of February 28, 2023. JACI Asia Pacific index sector weights are estimates from J.P. Morgan based on the new index.

Implications for investors

Comparing the two indexes, the JACI has a high single-market exposure to Mainland China, while the JACI Asia Pacific Index sees this concentration diminished. Historically, China credit has at times exceeded 50% of the JACI weight due to the country’s dominance in new issuance trends and its importance as a growth engine for Asia. Therefore, a possible downside of the JACI for some investors is that they could face a high and potentially unwanted concentration in a single market versus the broader Asian credit universe. From this perspective, introducing the JACI Asia Pacific Index, which broadens exposure to include Japan and Asia-Pacific countries, helps to reduce the overall concentration in single markets.  

At the same time, the weighting for sovereign issues in the JACI Asia Pacific Index is lower at around 10.4% (versus 15.0% of the JACI), while the index’s exposure to corporate (including quasisovereign) issues is higher at just under 90.0% (versus 85.0%). As such, adopting the JACI Asia Pacific Index may help improve regional and sector diversification and reduce overall concentration risks.

Based on backtested results and analysis from the index provider, the JACI Asia Pacific Index has outperformed the JACI over the past six years, with cumulative returns of 8.96% versus 7.87% and lower volatility of 4.79% versus 5.34%, respectively. The JACI Asia Pacific index also achieved a Sharpe ratio of 0.31 versus 0.25 for the JACI.⁴

Concluding thoughts

As an Asian bond manager and asset owner, we’ve actively invested across the broader Asia-Pacific fixed-income universe, including Japanese and Australian issuers, for well over a decade. From our experience, we view such credits as being typically well supported by investors. The extension of the investment universe through the introduction of the JACI Asia Pacific Index may prove attractive for some investors looking for broader exposure to the Asia-Pacific region, with the potential for an improved risk/return profile as well as lower volatility. 

Given our extensive credit research footprint with fixed-income teams based on the ground across Asia, including Japan, we already have strong coverage and existing relationships with many of the new Japan, Australia, and New Zealand issuers that will form part of the JACI Asia Pacific Index. Accordingly, we believe we’re in a prime position to help customers navigate this exciting new phase of development in Asian credit. 

1 J.P. Morgan, March 16, 2023. 2 J.P. Morgan, as of February 28, 2023. 3 J.P. Morgan, as of February 2023. 4 J.P. Morgan, as of December 30, 2022. JACI Asia Pacific Index performance is backtested and hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. The backtest is based on mapping the new JACI Asia Pacific Index constituents and running historical return/risk time series analysis.

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Murray Collis

Murray Collis, 

CIO, Asia (ex-Japan) Fixed Income

Manulife Investment Management

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