Asian high yield bonds have been experiencing non-traditional low volatility and have low default expectations, which make them a safe haven investment compared to US high yield products, according to Tim Jagger, Aviva’s senior vice president and portfolio manager for fixed income in Asia.
Asian high yield has historically delivered a higher average return than US high yield, but with a very high level of volatility, Jagger said, adding that the siutation has reversed this year.
“If you look at what has happened year-to-date, Asia high yield has generally delivered a better return at a lower level of volatility than US high yield. US markets were quite volatile over the first seven months [of 2014] given the well-reported outflows from that asset class.”
He added that in July, US high yield debt prices plunged following a warning from the US Federal Reverse about high yield valuations, but Asian corporate high-yield bonds were far more resilient.
Traditional outperformer
Since October 2005, Asian HY has delivered annualised returns of 10% compared to 8.7% for US high yield.
In the six months to August, Asia HY delivered twice the return of comparable US products, according to data from Aviva.
“Within the high yield universe, Asia stands out offering the best risk-return in the current environment,” Jagger said. “You are looking at a mid-to-high single-digit returns out of Asia in the short-term.”
Supporting the performance is a reverse of capital flow from emerging market debt (EMD), which experienced outflows in 2013 sparked by the taper tantrum.
This year, there has been a reallocation of portfolios back into EMD, which is more institutional driven rather than retail, Jagger said
“Asian high yield, being an EMD asset class, has also benefitted.”
Appetite for Asian HY
The Asian HY market is dominated by China, which accounts for half of the universe. The other major issuing countries are the Philippines, India and Indonesia.
The Asian high yield bond market has more than tripled since January 2010 with a market capitalisation of nearly $113bn, according to a report from Aviva.
“The market is growing very strongly, about 20% per year, in terms of the market capitalisation of the indices. And yet, we are still seeing relatively less volatility.”
Jagger cited an example of one recent issuance by Bank of China that raised $6.5bn.
“There is still a lot of appetite for appropriate price risk out of Asia. We are looking at a year of record issuances of Asian high yield debt for the third or fourth consecutive year.”
Default probabilities
Jagger has managed the Aviva Investors Asian High Yield Bond Fund since its launch in June 2013.
China has a 55.1% weighting in the portfolio followed by India, the Philippines and Indonesia with 8.9%, 8.6%, and 7.9% allocation, respectively.
Jagger said there could be two-three companies that could land into trouble in Asia. Aviva has avoided those issuers in its portfolio.
He sees a likelihood of default in Indonesia from one of the coal producers and a couple of companies in China.
According to the latest commentary mentioned in the fact sheet of the Aviva Investors Asia High Yield Bond Fund, Berau Coal Energy became distressed over the past month and its problems led to a fall in prices of most of the other commodity names.
“I will argue when you are talking about 2.5-3% default rate in Asia, that typically means three-four defaults from 160 issuances in market. It is not a huge number in absolute terms,” Jagger said.”
