Following this summer's emerging-markets exodus, Asian high-yield corporate bonds present opportunities for selective investors, says UK-based asset manager Aviva Investors.
Fed chairman Ben Bernanke’s hints in May that it would look to curtail its quantitative easing programme led investors to yank billions from EM stock markets. Bond investors followed as EM currencies weakened – India and Indonesia were hit hard given the size of their account deficits. (India's stood at $21.8 billion, or 4.9% of GDP, through June this year, while Indonesia’s was at $9.8 billion, finds HSBC.)
The exodus had a trickle-down effect from sovereign bonds to corporate high-yield, and has impacted year-to-date returns. The JP Morgan Non-Investment Grade Index is up 1.35% year-to-date, while the Barclays US Corporate High Yield Index is up 3.9%.
As a result, Aviva lowered its exposure to Asian high-yield corporates a month-and-a-half ago, says Tim Jagger, senior vice-president and fixed income portfolio manager at Aviva.
Now Jagger feels some of the sell-off has been overdone, and believes Asian high-yield bonds "attractively valued relative to US [high-yield bonds]", noting that the former are 1.2% more than the latter at the moment.
Another aspect is that Asian high-yield bonds offer low correlation to US interest rates. "What that means is that periods of rising rates don't mean it's a bad environment for Asian high-yield bonds," Jagger stresses.
Interest rates are due to rise, he notes, making short duration Asian high-yield corporate bonds attractive. According to Jagger, while Asian corporate high-yield bonds are up around 2% YTD, global high-yield corporate bonds are in negative territory.
"We think if you look at a whole portfolio of fixed income investments, Asian high-yield corporate is a pretty good place to be," Jagger says.
Among sectors, Aviva is keen on Chinese property developers. “That comes with a lot of noise,” Jagger concedes, pointing to discussion about a bubble forming. “But the underlying performance of these companies is strong. A lot have done their refinancing.”
He also likes infrastructure plays in China. “There’s a lot of investment in railways, for example, so we’re thinking of [adding exposure] to names in the cement sector and the automation equipment sector,” Jagger says.
But he acknowledges investing in Asian high-yield corporate debt is not without risks. The US has a “very good regulatory environment and defined legal structure”, Jagger notes, and as such offers an advantage to US high-yield bond investors.
“It’s robust in Hong Kong and Singapore, but there are places where the [high-yield debt] environment is evolving, such as China, Indonesia and the Philippines. So for us, that means you have more emerging market risk when investing in Asian high-yield than US. And you need to adapt your investment style accordingly.”
Ultimately, the long-term growth story for Asian nations hasn't changed. And Jagger anticipates the number of Asian corporates issuing bonds will increase.
“A lot [of the issuance] will be for refinancing. We’re going to see more first-time borrowers,” he says. “Banks are a lot more reluctant to hold assets on their balance sheets and will encourage companies to turn to bonds instead.”
“The [Asian high-yield corporate debt] asset class has really come of age in the last three to four years," he adds. "The market capitalisation of the JP Morgan Non-Investment Grade Corporate Index has trebled since 2010 to $92 billion versus $30 billion."