Participants on the fixed-income panels at the recent Fund Selector Asia Breakfast Briefing events in Hong Kong and Singapore agreed that investors should take more risk in terms of credit while keeping duration risk to a minimum as investors seek out yield amid historically tight spreads.
Earlier this year, as investors braced themselves for as many as seven rate cuts while the possibility of a hard landing was much higher, most asset allocators were advocating extending duration.
“If I take a step back and look at the year, I think most of the private banking street were very much advocating for higher quality and investment grade and maybe lengthening of duration as we suspected or feared a harder landing. We still maintain that credit exposures should be of higher quality especially in the context of overall portfolio construction whilst we see more room for softer/no landing scenarios to play out and yield carry to be an important part of the return equation as we move into 2025,” said John Cheng, managing director and head of managed solutions at LGT Bank.
Panellists at both recent events favoured the intermediate to shorter part of the curve, while they advocated looking at credit for yield pick-up, albeit they stopped short of advocating investing in some of lowest quality high-yield issuers.
“Harness the rates opportunity through the shorter or intermediate part of the curve. And dip a bit more into credit quality, by taking more credit, rather than rates risk.”
Ecaterina Bigos, CIO, core investment, Asia ex-Japan, AXA Investments Managers
The reason for the emphasis on shorter duration was twofold. Firstly, the fact that the carry on even short-dated Treasuries is already attractive with two-year T-bills most recently quoted at 4.244%.
Secondly, while the medium-term trend is likely to be towards interest rates going down, there was a possibility of greater volatility in rates as well as a risk that some of Trump’s inflationary policies could weigh on the outlook for long duration bonds.
“When it comes to rates, it is likely to be volatile in 2025. Contribution to returns could be positive, but we need to be cognisant of the timing of policies from incoming administration. Harness the rates opportunity through the shorter or intermediate part of the curve. And dip a bit more into credit quality, by taking more credit, rather than rates risk.” said Ecaterina Bigos, CIO for core investment in Asia ex-Japan at AXA Investments Managers.
“Although we are expecting that cash yields are going to come down across the world, we think that the interest rate volatility will increase due to the deficit and how the market perceives Trump’s policy. Hence, we recommend clients stay in shorter duration, say below five years,” said Heather Lei, head of A&S investment funds for north Asia at UBS Global Wealth Management.
Credit quality
The panellists agreed that investors should look at credit as they search out yield, although there was a dispersion of views in terms of how far down the curve they should go and which sectors they favoured.
UBS’ Lei favours investment grade and is neutral in terms of high yield, although she noted that there were pockets of opportunities in financials, particularly hybrids like AT1s. She noted that financials were very much taboo last year due the various regional bank issues, although there was a good pick-up in spreads for AT1s and the fundamentals of banks remained strong.
Nigel Foo, head of Asian fixed income at First Sentier Investors, also expressed caution about high yield given the fact that all-in yields were no longer as attractive as they used to be as the sector has rallied strongly this year.
“We are a little bit more cautious on high yield. Again, you possibly could get 6.5% for BB-rated name and that used to be trading at between 8% or 9% not too long ago. The market has rallied a lot. While I don’t think many of the BB-rated names will default, I will be more patient keeping my allocations in the safer assets and await for opportunities,” he said.
“We still stay in the higher quality part of high yield. We are more cautious among the low-quality high yield issuers, whereas the double-Bs and single-Bs, as well as more defensive sectors, we are seeing the potential rising star opportunities.”
Huang Jing Jing, senior vice president, product strategist, PIMCO
Similarly, Fiona Kwok, portfolio manager at First Sentier Investors, said that it was important to be selective, while in terms of sectors, her views were largely in line with market consensus as she singled out Macau gaming.
“If you are asking me do you still like Asia high yield, I think we need to be selective. Some sectors are obviously benefiting from the China reopening story such as Macau gaming. It’s a safer choice within the high yield space, but otherwise it’s really a case by case,” she said.
In terms of high yield, Huang Jing Jing, senior vice president and product strategist at PIMCO, said that it was important to be focused on the higher quality part of high yield, and to actively capture rating migration opportunities such as the potential rising stars.
“We still stay in the higher quality part of high yield. We are more cautious among the low-quality high yield issuers, whereas the double-Bs and single-Bs, as well as more defensive sectors, we are seeing the potential rising star opportunities.” she said.
Country diversification
Overall, panellists also emphasised looking at markets outside the US in search of yield as increasing dispersion between different markets and regions was a big theme that came up in discussions.
PIMCO’s Huang, for example, emphasised that while she was neutral in terms of US duration, she saw interest rate opportunities in other parts of the world, for example in Australia and the UK, where PIMCO was overweight duration because of the relative value presented.
“While people are super-focused on the US, what the Fed policy will be and Trump’s agenda, we want to remind everyone in today’s market, it’s important to keep the global perspective,” she said.
James Cheo, chief investment officer for southeast Asia and India for global banking and wealth at HSBC, emphasised the opportunities in Asia beyond China property, although he did note at the same time that China government bonds had performed well because of the disinflationary trend.
“Inflation is clearly in Asia very much under control. In China, there’s actually disinflation. You want to be invested in places where inflation is not an issue. If you look at China bonds for example, especially local government bonds, those are doing very well,” he said.
“Little money has flowed to the emerging market Asia high yield and that’s because a lot of people have lost money when they bought three, four years ago and following the China real estate defaults, many investors are still nursing some losses there.”
John Ng, co-head, managed solution sales, DBS Bank
The opportunities in Asia was a common theme and First Sentier Investors’ Kwok pointed out that within the JACI IG index, out of the top 20 issuers in China, 16 were now central state-owned enterprises or their subsidiaries/associates so concerns about China property were ill-founded.
She also noted that technicals in Asia were more favourable compared with other regions following three consecutive years of net redemptions as a lot of Chinese issuers in particular had switched their attention to the domestic market.
John Ng, co-head of managed solution sales at DBS Bank, noted however that Asian credit remained a difficult sell this year because of the difficulties experienced in the past several years.
“Little money has flowed to the emerging market Asia high yield and that’s because a lot of people have lost money when they bought three, four years ago and following the China real estate defaults, many investors are still nursing some losses there,” he said.
AXA Investment Managers’ Bigos also pointed out that the European Central Bank was set to normalise monetary policy much faster than the Fed, which made European bonds attractive, while at the same time the hedging costs will become less prohibitive compared with dollar-denominated assets.
