The coronavirus pandemic has undoubtedly driven up default risk for fixed-income assets, but some investment experts believe Asian bonds will suffer less than bonds in other markets, offering opportunities.

Default rates across bonds are expected to increase given the deterioration in the global economic environment. A lot of industries, especially the oil and gas sectors and consumer-related companies will get hurt, Cecilia Chan, the chief investment officer of fixed income for Asia Pacific at HSBC Global Asset Management, said in a webinar hosted by the fund house and AsianInvestor.

 
Cecilia Chan, HSBC

However, Asian default rates are expected to continue to be lower than global peers, given the more robust fundamentals of the Asian economies. Default rates in the region are expected to rise to 4% in 2020 from 1.6% last year. But the number will still be low compared with the US, or other emerging markets like Latin America, Chan said in the webinar held on Thursday (June 4).

Moreover, there will be little systemic risks in the Asian bond market. The risks will mostly be idiosyncratic ones, she said.

 

Jethro Goodchild, the chief investment officer of FWD Hong Kong, echoed Chan's view. He cautiously favoured high-yield bonds in the Asian market, while Chan said investors could choose between Asian high-yield and investment-grade bonds, depending on their risk profiles.

The Asian bond market is less vulnerable than the US because more corporates in this region will likely receive more sovereign support, in contrast to those in the US, so the default rates will be contained, Goodchild said.

Jethro Goodchild, FWD
 

In the US bond market, there are far fewer government-related energy companies. There are more consumer discretionary, hotels and airlines issuing debt, making the US bond market more vulnerable, he added.

The Asian bond market appeals to issuers as well, particularly those in Hong Kong.

The Hong Kong dollar is unique at the moment. The currency has a very strong exchange rate, but the Hong Kong dollar yield curve offers a premium over the greenback, said Andrew Fung, the chief financial officer of Henderson Land Development.

Most Hong Kong corporates rarely tap the domestic bond market to raise funds. But since last year, many local corporates are more willing to go into the debt capital market to expand their maturity profile, he said.

GEOPOLITICAL RISKS

All the speakers agreed that geopolitical risk is an important factor that affects investors' appetites for Asian bonds in the current environment, at least over the short term. However, many of them see opportunities in the uncertain climate.

"When spreads widen due to a macro event, rather than an idiosyncratic event, then take advantage of that,"  said Goodchild. "Volatility creates opportunities. But you've got to do your homework on those names that are going to ride out the storm."  

Paul Carrett, group CIO of FWD, told AsianInvestor last month that the insurer was keen on investment-grade bonds in the region as it sought reasonably yielding debt that is unlikely to be downgraded into junk territory. In credit, this is a period that calls for active management," he said.

HSBC's Chan added: "I found there are more opportunities in the market. It's good timing to buy into some good quality credit at a decent yield. The opportunity did not exist last year."

Andrew Fung,
Henderson Land

And from the issuer's standpoint, offering longer-term bonds may be the way to guard against risks.

"If you look at the geopolitical risk, you'll try to extend the tenor to secure relatively long-term money for the debt management of a company," Fung said.

Geopolitical risks affect US debt as well, as relations between the US and China worsen. However, Asian asset owners were seen eagerly buying newly issued and highly rated US corporate bonds just a few months ago.

Investors from the region allocated a net $1.37 billion into US investment-grade debt in the first three months of this year, following net outflows of $9.08 billion during 2019, according to data provider eVestment. It took place when the US Federal Reserve pledged in late March to start buying corporate bonds, causing spreads in investment-grade bonds to narrow considerably.