ASIAN FIXED INCOME SPOTLIGHT
High hopes for high yield
Against a challenging backdrop for fixed income globally, investors should look to Asia for a reliable source of income and growth across the risk/return, liquidity and country spectrums.
Neeraj Seth, Head of Asian Credit, highlighted some of the key trends and opportunities within the sector.
Fixed income investors who are understandably nervous about whether they can find a good balance of fundamentals and valuations can count on a positive outlook for Asian fixed income and credit.
We remain constructive for the remainder of 2021 for this asset class. We have entered the decade of Asia, with 2020 as a pivotal year when the shift started.
Building portfolio resiliency with the ability to understand top down macro and policy view, country and sector allocation, and bottom up security selection will be important to build strong performing portfolios in Asian high yield.
Bullish on Asian high yield
The rest of 2021 bodes well for Asian high yield.
The spread pick-up in Asian high yield relative to US or European high yield is close to the highest level we have seen over the last five years. Overall, we are constructive on Asian high yield and expect reasonable potential for spread compression along with high carry to provide attractive returns between now and the end of 2021.
It is an even more compelling asset considering expected default rates are benign for the rest of 2021, providing an attractive entry point for investors looking for yield and income.
Chinese real estate high yield bond
The Chinese real estate high yield bond market dominates the regional high yield sector, and should continue to play an important role in income-seeking portfolios despite the market over-reaction in recent months. The government’s “three red lines” policy, for example, will be challenging in the near term but positive over the long term.
The sector has underperformed the rest of the high yield space in the region, as well as in the rest of the world.
We do expect the focus on deleveraging from Chinese regulators to continue but don’t expect that to cause any systemic risk for the sector.
Further, the likely slowdown in new issuance and market exits of some weaker property players will be healthy for the market.
Given the ongoing stabilization and improvement in fundamentals, the current state of China high yield provides really attractive risk-adjusted returns from a top-down perspective, and an ability to cherry-pick attractive credits through bottom-up security selection.
Choosing China
More broadly in China, the onshore markets across rates and credit are appealing in the Asian fixed income and credit space.
The opening up and integration of Chinese debt markets remains one of the biggest shifts happening this decade.
Coupled with attractive nominal and real yields, plus the benefits of diversification, the fact that global investors remain under-invested in the country’s bond markets is expected to drive demand in onshore debt.
More specifically, China’s onshore credit markets –with foreign ownership accounting for less than 0.5% relative to around 3% in the broader bond universe1 –offer growing potential as policy-driven deleveraging creates dislocations and inefficiencies.
The spread pick-up in Asian high yield relative to US or European high yield is close to the highest level we have seen over the last five years.
