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Like many fund managers, Aberdeen believes the market is pricing in too much risk of corporate credit defaults.
Investment grade bonds are trading at a level that discounts a default rate of at least 35% to 45% over a five-year period. Adjusting for risk premium, some say the effective default rate assumption is as high as 55%. ThatÆs unprecedented for any previous five-year period including the Great Depression.
ôThis is not a recommendation for clients to go blindly into corporate bonds,ö says Donald Amstad, Singapore-based director for business development at Aberdeen. Certain corporate bonds are now attractively priced.ö
The indiscriminate selling of corporate bonds has also led to interesting opportunities in securitised assets, Amstad says, noting that high-quality assets are available with yields of 14% to 18%.
ôThe great thing about this wave of selling at the moment is the good is being thrown out with the bad. We are in the business of trying to pick up the good assets,ö Amstad says.
Last week, Aberdeen bought an undisclosed amount of the Export-Import Bank of KoreaÆs (Kexim) $2 billion five-year senior note issue. The bonds were issued at a yield of 8.218% which was 677.7 basis points over the five-year US Treasury yield, 625bp over mid-swaps, 280bp over Kexim credit default swaps and 350bp over the Korean sovereign CDS.
ôThe issue had a yield to maturity of more than 600bp over US government bonds and so even if we are fully aware that there are risks in Korea, we fully believe it is a risk worth taking,ö says Amstad.
In terms of equities, Aberdeen believes that Asia provides the best risk-return opportunities. After all, exports may be down but high savings rates, healthy government balances and low corporate debt levels will help the region recover from the global economic recession.
Another advantage for Asia is the quality of its banks, which Aberdeen believes are better regulated and armed with stronger balance sheets. Asian banks generally stuck to a traditional lending model and did not venture into the more exotic areas that plagued Western banks.
ôItÆs hard to underestimate the seriousness of what we have experienced. What we are trying to do is peel off the layers of complexity,ö says Peter Elston, Singapore-based strategist for Asia at Aberdeen.
Elston says investors should stick to careful stock selection rather than go for indices.
ôInvesting in an index is a lot of rubbish,ö Elston says. ôUsing that approach, you would only have 3% exposure in Asia (within a global equities portfolio). Benchmark-hugging is a cowardly approach.ö
Hugh Young, Singapore-based head of equities at Aberdeen, told AsianInvestor in a previous interview that companies that are highly geared or are overly dependent on the export sector will underperform while companies that have healthy balance sheets, dominant competitive positions or are more domestically oriented will outperform.
Examples of stocks Aberdeen likes include QBE Insurance, Oversea-Chinese Banking Corporation (OCBC), and Jardine Strategic Holdings.
QBE Insurance is one of AustraliaÆs leading general insurance and reinsurance companies. Its business is well diversified by both product and geography. It also has a good long-term track record of generating shareholder returns.
OCBC is a well-run Singaporean bank seeking to generate additional value for shareholders by restructuring assets and via regional expansion.
Jardine Strategic is a Singapore-listed conglomerate with interests across the region spanning property and retail.
As a result of its stock picking, countries in which Aberdeen is overweight relative to the benchmark include Singapore, India and Hong Kong.
The AU$85 billion ($61.6 billion) Australian super fund has some exposure to indebted property developer Evergrande. Meanwhile, China’s construction finance is part of its core strategy in real estate.
Investors are seeing the risks, but also the opportunities of the logistics sector. Warehousing their fears for the moment, they can see it's a good conduit to high-growth assets.
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SGX’s new framework for Spacs will likely provide investors with a much-needed channel for direct deals, but the verdict is still out on whether it will bring liquidity to the bourse.