David Tan, Allianz Global Investors
Trade tensions, China de-leveraging and clear signals of future US interest rate hikes sent Asia high yield bond prices sharply lower in the second half of 2018. By the end of the year, yields on single-B credits had surged to historical highs of close to 9%.
“Valuations became extremely attractive, especially when those macroeconomic factors suddenly transformed at the start of this year,” Tan, portfolio manager and the firm’s Asia Pacific fixed income CIO, told FSA in an interview.
Schroders is also bullish on Asia bonds this year, specifically, US dollar denominated corporates. Pimco is more cautious on Asia bonds, but favours certain hard currency corporates in China, India and Indonesia.
Whether the change is real or simply a matter of perception, the prevailing outlook among investors, reflected in the performance of most equity and bond markets, has shifted to optimism that global economic growth will continue for longer, until gradually slowing next year. At the same time inflation expectations have been dampened.
“The US bond market is now pricing in an interest cut by the Fed, with the yield on the 10-year US treasury note falling to 2.5%. Meanwhile, China’s policy makers have implemented several stimulus measures to boost the country’s flagging economy,” said Tan.
“There has been a complete reversal of expectations, which should be supportive of Asian high yield [sub-investment grade] credit.”
Tan manages the $1.4bn Allianz Dynamic Asian High Yield Bond Fund, which was launched in January 2017. It has posted a 7.96% return year-to-26 April, outperforming its JP Morgan Asia Credit Index (JACI) benchmark (5.54%) and higher than its sector average (7.71%).
“We were able to buy bonds at cheap valuations before the rally took off,” said Tan.
He pointed out that historically, Asia high yield bonds trade in a range of 5%-8% yield. So even now, with yields on single-B credits at around 7.5%, they continue to offer good value.
Tan likes offshore Chinese property companies, which have been prolific issuers so far this year. They have doubled their US dollar bond issuance to $32bn since the start of the 2019 as they seek to refinance higher-cost and shorter-term debt, according to the Financial Times, citing data from Dealogic.
Indonesia is Tan’s second largest country allocation, where “the commodity space should benefit from continued global and renewed Chinese demand”, he said.
The average duration of the fund is two years, and Tan is an active user of US treasury futures to shorten or lengthen duration. He currently prefers the interest rate carry and low volatility of a short duration portfolio.
Although its recent performance has been strong, the fund has posted a 5.8% cumulative return since inception, which is less than the JACI return of 10.12% and the US dollar high yield sector average of 8.82%. Its annualised volatility is higher too, at 3.99% compared with the 3.29% for the sector.
“The biggest risk to the fund’s performance this year is if there were a sudden spike in inflationary expectations, which would send yields higher,” said Tan.
Allianz Dynamic Asian High Yield Bond Fund vs US dollar high yield and Asia-Pacific fixed income sector averages