Uneven recovery creates dispersed opportunities in resilient Asian bond market
“As the largest economy and issuer in Asia, China anchors the risk sentiment for the region in general, and for the asset class in particular,” says Arthur Lau, head of Asia ex Japan fixed income at PineBridge Investments.
He believes China’s recovery has injected a dose of optimism into the market. The speed and size of fiscal and monetary easing across the region and the decisiveness of governments, particularly in North Asia, in containing the virus also played an important role in reining in a deeper crisis. And some Asian governments still have room to exercise additional fiscal supportive measures should the outlook deteriorate in the short term, adds Lau.
“The Covid-19 crisis has shown yet again the resiliency of Asian bonds in the face of severe market stress,” he explains, adding that the performance of Asian bonds during this period supports the case of a stand-alone allocation to the asset class as an effective diversifier in global portfolios.
Why Asian bonds
Four key factors underpin the performance of Asian bonds.
Firstly, Asian bonds offer better yields than US and global bonds of the same credit quality. Durations are also lower1, positioning the asset class as an attractive diversifier in a global portfolio.
Asian bonds offer better yields, lower duration
Source: Bloomberg, PineBridge Investments, as of 29 June 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
Secondly, credit fundamentals are stronger than in other regions. Corporate financial discipline in recent years have improved net leverage (second lowest versus other regions), and interest coverage (second highest versus other regions)2.
Asia credit metrics remain steady
Source: BAML, PineBridge Investments. Data as of 31 December 2019. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
Thirdly, technicals remain supportive – demand is largely stable, anchored by a growing Asian institutional investor base and supported by liquidity from global and regional monetary easing, which has led to a recent uptick in foreign investor inflows. PineBridge expects gross supply to be flat compared to last year.
Finally, while the default rate is expected to edge up as more vulnerable sectors face credit downgrade pressures, the forecast rate of 6.4% for Asian high yield remains well below that of US, European and global high yield3. The Asian bond market has a strong core in the more financially-stable investment-grade bonds, which make up approximately 80% of the market4. Lau also notes that the Asian ‘fallen angel’ risk remains benign at 4%.
Asia’s recovery is likely to be uneven across sectors and markets, plus some headwinds linger – for instance, a few Asian countries are still racing to contain the virus amid warnings of a second wave and US-China tensions continue to simmer in the run-up to the US presidential election in November.
This makes for an environment with highly dispersed returns, says Lau, who leads a team that manages and sub-advises over $15 billion in Asia ex Japan fixed income strategies with a zero-default track record5.
Asian sub-investment grade bonds, for instance, have been excessively discounted due to unjustified default fears and should now offer a rich hunting ground for value opportunities for active credit selectors, he says, adding that both investment grade and high yield spreads have room to compress further, with high yield potentially offering higher upside.
The PineBridge team prefers issuers that have robust cash flows, low refinancing needs in the short term and strong ties to sovereigns. As of July 2020, the team had an overweight position on Chinese property companies and central government state-owned enterprises, but was underweight local government financing vehicles.
Among Chinese property issuers, which made up more than half of new Asian high yield supply in 20196, established players with stronger balance sheets are preferred. The team is also sanguine on Indonesian quasi-sovereign issuers, Asian tier 2 bank capital securities and companies in India’s renewable sector, which is expected to see continued public and private sector investments.
Meanwhile, the team sees continued weakness in the Indian financial sector, which was struggling with bad loans even before the pandemic. It is also avoiding commodities producers with weaker credit profiles due to the global demand slump.
In times of volatility and low earnings visibility, Lau emphasises there is no substitute to intensive bottom-up and top-down research. “Thorough issuer-by-issuer research is key and that cannot be accomplished without local presence and the cumulative experience of investing through numerous economic cycles.”
For more on PineBridge Investment’s fixed income capabilities and insights, please visit www.pinebridge.com.
1. Source: Bloomberg, PineBridge Investments, as of 29 June 2020.
2. Source: BAML, PineBridge, as of 31 December 2019.
3. Source: PineBridge Investments, Moody’s as of 31 March 2020.
4. Source: J.P. Morgan, as of 31 March 2020.
5. Zero-default track record refers to the underlying securities of the portfolios managed by PineBridge Investments Asia Limited Fixed Income Team, as of June 2020.
6. Source: J.P. Morgan, as of 31 December 2019.
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