Market Views: Which Asian bonds are most appealing?

As US fixed income default rates rose and yields fell during the pandemic, are Asian bonds, which have had more stable yields through 2020, looking more attractive?
Market Views: Which Asian bonds are most appealing?

Asian fixed income has historically been viewed by institutional investors as unattractive, as the region's debt capital markets lagged its economic growth. But as the pandemic hit western markets last year and Asia's bond markets continued to mature, investors have begun to view it differently. 

A hunt for yield drove institutional investors to start viewing Asian bonds more favourably last year, as US bond yields fell and investors noted that Asian bonds - high-yielders in particular - often have state support, which was assumed to mean lower default risk.

US aggregate yields fell from a 2.3% high in March 2020 to barely 1% in July, while Asia Pacific aggregate yields have risen steadily since the start of 2020, narrowing the gap. While US aggregate yields are now hovering at 1.5%, Asia Pacific's is not far behind at 1.2%, according to Bloomberg World Bond Indices. 

Dutch pension fund APG Asset Management expanded its China fixed income team last year with three new hires, while HSBC Global Asset Management and FWD Hong Kong said that they believed Asian bonds would have strong resistance against impact from the pandemic compared with other markets.

Despite the shock from high-profile defaults by state-owned enterprises (SOEs) in China, industry experts still view Chinese corporate bonds as attractive.

Asia Pacific's high-yield corporate default rate was 7.3% in 2020, and Moody's expects this to fall to 3.6% by the end of 2021. Comparatively, US corporate default rate in 2020 was 3.79%, while it rose to 6.63% for speculative grades, according to S&P Global.

Some investors also point out that emerging market green bonds, Hong Kong dollar bonds and high-grade Singapore corporate bonds also show promise. In general, a survey conducted in March by AsianInvestor’s Asset Owner Insights found that 70% of Asia-based asset owners prefer investment-grade bonds.

In light of these findings, six fixed income experts tell AsianInvestor why Asia bonds are attractive this year and in which markets they see opportunity.

The following contributions have been edited for clarity and brevity.

Murray Collis, deputy chief investment officer of fixed income for Asia ex-Japan
Manulife Investment Management

Murray Collis

We are constructive on Asia’s long-term economic fundamentals, despite the resurgence of Covid in some Asian economies that will likely dent the growth outlook in the near term.

Therefore, credit selection is crucial in picking issuers that can weather this period. For instance, as the Covid situation in AAA-rated Singapore stabilises, we see opportunities in high quality Singapore corporate bonds at attractive levels. We are also participating in ESG themed bonds across Asia from a range of issuers such as Chinese property developers and Indian renewable energy firms. Our credit team has been uncovering opportunities in oversold short-dated Asian high yield bonds and we are diversifying into onshore China government bonds due to their low correlation with global rate markets.

Overall, we believe the search for yield will continue to support Asian bonds while global central banks are looking to maintain a stable interest rate environment regardless transitory inflation risk.

Pierre Chartres, fixed income investment director
M&G Investments

Pierre Chartres

Asia has been more resilient throughout this crisis. Yields are on the whole usually a little bit lower than what you can get in other parts of the world, because often risks are actually lower. So it's about finding opportunities within bond funds.

We do like Chinese corporates, to some extent, we have some exposure there across new technology, real estate, capital goods. But on the sovereign side, we are maybe finding less opportunities than in other areas.

In Thailand, the downsides to growth I think are still there, yet yields as government bond investors remain extremely low. We have seen adjustment in other parts of the world of higher government bond yields. Some parts of Asia [such as] Malaysia has started to adjust.

In Asia, currencies remain relatively low. But we have been finding some opportunities in corporate bonds, mostly in hard currencies within Asia.

Haidan Zhong, senior client portfolio manager for fixed income

Haidan Zhong

We remain constructive on Asia credit on the back of an improving global growth outlook and additional stimulus. Although Asia credit underperformed in the past month, the segment was mainly dragged down by idiosyncratic risks. We expect continuous credit divergence in Asia and especially China credits, therefore, credit selection remains key.

President Biden’s recently-issued executive order updated the list of sanctioned entities in China and clarified the scope of the action – while most of the sanctioned entities are similar to the old list, a few names have been removed. We think the new executive order has removed the sanction overhang over China investment-grade State-Owned Enterprises (SOEs), which would create some support to the SOE sectors.
It has been a tough first half for the high-yield property sector. We stay selective on this sector and believe companies with good fundamentals should have better performance in the second half.
Overall, we believe high-yield offers better value than investment grade. We continue to actively look for relative value opportunities emerging in the market.

Geoffrey Lunt, director and senior investment specialist of Asian fixed income
HSBC Asset Management

Geoffery Lunt 

(As presented at AsianInvestor’s Asian Investment Summit)

Demand for Asian bonds from global investors has been huge in the last 18 months, and never been stronger. And that's not surprising, I think, given the attractive characteristics that a lot of these markets display ESG and sustainability is becoming increasingly important. And from that point of view, the future is certainly extremely bright. Expect more issuance in this market, expect more global investors to get involved.

A major driver is Mainland China. In fact, the share of Asia outside China is not dramatically larger than it was 10 years ago. But if you look at the contribution from Mainland China, it is truly dramatic. And you wouldn't say that this is particularly the period which represents the strongest growth that we've seen in mainland China over the last 20 to 30 years. But it's really that move into the debt capital markets [and] the internationalisation of the Chinese markets, which have led to this dramatic growth.

Unusually, because of those extraordinarily tight spreads in the US market at the moment, Hong Kong dollar bonds are unusually competitive. In terms of yield, usually they yield very low. But at the moment, with the peg still firmly in place, then actually Hong Kong dollar bonds are looking more attractive.

Angus Hui, head of Asian and emerging market credit and fixed income

Angus Hui

We see more companies showing signs of recovery and valuation is more attractive than most other credit markets. However, the financing environment remains challenging in Indonesia.

In the next few years, we expect more opportunities in the area of sustainability. So far this year, close to 20% of gross issuances in Asia have been in green, social, sustainability and sustainability-linked bonds, and now Asian issuers are the largest source of ESG bonds across emerging markets. We expect this trend to continue.

In particular, we see opportunities in the renewable energy sector and green bond issuances from property companies. One of the investment opportunities is to identify names with improving transparency and governance, as well as those with a thoughtful approach to transit and manage their climate risks.

For example, coal-mining companies will find it harder to secure funding and hence credit risks will increase. In comparison, energy companies with a proper transition framework will be more competitive.

Martin Dropkin, head of Asian fixed income
Fidelity International

Marty Dropkin

Given the low yield environment worldwide and increased volatility across major asset-classes, global investors are looking for an asset class that can potentially offer low correlation benefits and attractive risk-adjusted returns.

The broad China bond universe fits the bill quite nicely given its higher yield, a relatively independent monetary policy, and lastly strong technical support, as we expect foreign participation to increase with the official index inclusion of China Government Bonds (CGBs).

Looking forward, we expect the Chinese government to have a good balancing act between supporting the economy and deleveraging, as the laggard consumer-side data potentially reveals pockets of uneven recovery in the economy.
Against this backdrop, we see good value in investing in CGB, which have delivered superior returns year to date versus other major government bond markets and still offers comparatively attractive yield with the 10-year CGB yielding above 3%.
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