Market Insights

Chart of the Month

In this monthly series, we highlight an interesting chart in the Asian fixed income space, explain the underlying trend and share our insights on why we think it is important.

China property sector being underrated?

chart of the month-august

Source: S&P Global, 30 April 2021. Due to rounding, the total may not be equal to 100%.

A lot of the recent volatility in Asian high yield has been from the Chinese property sector, especially the single B space, due to continuing tight financial conditions. The concerns fed through to sentiments and we saw Asian single B spreads trading significantly over US single B credits; implying a China property sector default rate of over 15%1.

We believe this default situation is unlikely given improving credit profiles and the strategic importance of the property sector to China’s economy. In addition, we are seeing an increase in the number of developers complying to the three red lines (a measure of financial health; the more lines passed, the better the fundamentals).

We believe that cheap valuations in the Chinese property sector are not in line with its improving fundamentals. As active managers, we think its oversold B-rated segment is a good place to capture opportunities.

1Source: ICE BAML Indices, 30 Jul 2021

 


 

Should investors fear the credit events in China

2020 High yield Default Rates

For illustrative purpose only and there is no guarantee that the forecast will be realized. Source: JPMorgan Chase (Asia, US, Emerging Markets), BlackRock, April 2021 data and forecasts. Any opinions and/or forecasts represent comments on the market environment at a specific time. Estimates are not intended as predictions, guarantee of future events or future results. Index performance is for illustrative purpose only. Investors cannot directly invest into an index.

Recent credit events in Chinese state-owned enterprises (SOEs) and property sector have triggered investors to re-evaluate credit risks in their onshore bond exposures. We remain positive on China’s high yield property sector but expect policy tightening to weigh on near-term sentiment. As the sector enters its peak sales season, the government has introduced regulations to cool down the sector to ensure leverage is being controlled. This is equity negative but bond positive, and can be seen as a good development for the sectors’ credit profile over the long run.

We see a potential tick up in Chinese credit defaults this year, but not enough to pose systemic risks. We continue to expect a tighter credit environment onshore as the government is seeking to de-lever the economy and this means the strategic important SOEs will continue to outperform the industrial SOEs.


 

Asian credit and Asian high yield can better withstand rise in interest rates

Asian credit and Asian high yield

Source: BlackRock, 26 Feb 2021. Past performance is not a guide to future performance. Asian Credit: PM Asian Credit Index; Global Aggregate: BBG Barclay Global Agg Corporate Index; Asian High Yield: JPM Asian Credit non-IG Index; Global High Yield: ICE BAML Global HY Constrained Index (100% USD Hedged). Index performance is for illustrative purpose only. Investors cannot directly invest into an index.

Bond performance consists of price returns and interest income. Rising interest rates cause bond prices to fall, negatively impacting price returns. Yield / duration ratio measures the breakeven point at which falling bond prices will overwhelm the interest income, thereby resulting in a capital loss. All else being equal, the higher the ratio, the more your yield can withstand a rise in rates.

Interest rates, especially the 10-year treasury yield, have slowly begun to normalise from low levels. It would be prudent to invest in an asset class that is resilient to the ongoing rise in interest rates. Because of their higher yields and lower duration, Asian Credit and Asian High Yield have better yield / duration ratios than their global counterparts, allowing them to better withstand the impact of rising interest rates.


 

Asian high yield delivers higher yield at lower default rate

Asian high yield delivers higher yield

Source: Default rates from JP Morgan, 31 December 2020. Indices used for yield are ICE BAML Corporate indices, 29 January 2021. Index performance is for illustrative purpose only. Investors cannot directly invest into an index. There is no guarantee that any forecast will come to pass.

2020 saw a divergence in default rates between Asia and the US. US high yield (High Yield) default rate was double of Asian High Yield, mainly due to the impacts of the energy sector on the US High Yield market. Recoveries were also vastly different, with Asia High Yield at 40% versus US High Yield at 16%.1  

For 2021, US High Yield default rate is expected to be 4% while Asian High Yield default rate is expected to ease to around 2.4%. However, despite subdued expected default rates, Asian High Yield delivers a yield that is more than 2% higher than US High Yield.  This discrepancy highlights an opportunity in Asian High Yield as an asset class that can potentially offer high income supported by strong fundamentals.


Asian Credit to Benefit from Stronger Expected Growth in Asia in 2021

Asian Credit to Benefit from Stronger Expected Growth in Asia in 2021

Source: JP Morgan Global Outlook, September 2020. For illustrative purpose only. Subject to change. There is no guarantee that any forecast will come to pass.

Recent economic data has demonstrated that the Asian economic recovery has extended beyond North Asia to other parts of Asia. We believe that the efforts to contain the pandemic, coupled with an incoming vaccine, should buoy laggards in this recovery.

In India, for example, signs of recovery can be seen in economic indicators such as industrial production, purchasing managers’ indices and inflation. It should benefit greatly from the vaccine and the rebalancing of global supply chains.

This supportive macroeconomic backdrop, stable corporate fundamentals, attractive yields at a moderate duration means that Asian Credit is well-placed to attract global investor flows.