Junk bonds: time to load up or cut and run?

HSBC Global Asset Management and Sun Life Financial make a case for continuing to buy non-investment-grade debt, but others are less convinced.
Junk bonds: time to load up or cut and run?

Should institutions continue to pour money into high-yield bonds in search of higher returns than they can obtain from sovereign debt? The question split speakers at AsianInvestor's Southeast Asia institutional investment forum held this week in Singapore.

Canadian insurer Sun Life Financial, for one, is keen on the asset class. Its seven Asian businesses' portfolios are dominated by sovereign debt – in Indonesia it accounts for 95%, for example, and the Philippines 80% – but Asia head of investments Mike Manuel expects that to change.

“We want [to seek] higher yields in Asia by taking more credit risk as we have a lot of sovereigns – and want less liquidity because we have too much in the portfolio,” he said during a panel debate.

(Rotation into credit may come at the expense of equity exposure. Manuel also says he has cut stock positions in recent months, from around 5-6% of the total Asian portfolio to some 2%, following the strong recent rally and rise in volatility.)

Another backer of junk bonds is Cecilia Chan, Asia head of fixed income at HSBC Global Asset Management. Speaking earlier in the day, she tipped high-yield and offshore renminbi (dim sum) bonds to continue to outperform sovereign debt in 2014 as they have this year. The latter, Chan added, have developed into “an interesting niche market”.

Other investment specialists are more wary about high-yield market.

Institutional investors are often being told by fixed income managers that the place to hide is in high yield, so many are moving down the credit spectrum, says Trevor Persaud, who left Russell Investments as head of Asean and Taiwan last month.

Speaking on the same panel as Manuel, he said such moves concern him. Corporate default rates have been at historically low levels in the recent past, he notes, but expectations that they will remain low “is probably not prudent”. “As a result, returning to a more typical strategic asset allocation is probably best, unless you want to try to time the market.”

It doesn't make a lot of sense right now to be making any large bets right now, Persaud argues.

Certainly, others on the panel recommended a selective approach to markets.

Lim Say-Boon, chief investment officer at DBS Private Bank, says his firm has been “playing the differentation theme” in emerging markets. “Since the first mention of tapering [of the US quantitative easing programme], we felt markets would become more discerning, more discriminating about the emerging markets they invest in.” 

Lim identifies economies with current account shortfalls – such as India, Indonesia, South Africa and Turkey – as the ones that will struggle in 2014, just as they struggled in the second half of this year. 

“This differentiation leads us to look at North Asia,” he adds, where several economies have current account surpluses and are not dependent on US dollar funding to support their financial systems. Lim nevertheless suggests North Asia will still underperform developed-market economies.

Another panellist, Hiroshi Yoh, Singapore CEO and portfolio manager at Janus Capital, tips Japanese stocks to surprise on the upside next year, due to the fact that it will “finally see the reflation story in 2014”. As for emerging markets, he is bullish on China, citing low equity valuations – at 9x price-to-earnings compared with 15x four years ago.

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