Posted inFixed Income

Asian high yield mispriced credits

Various macro and market dynamics justify exposure to segments of regional high yield debt, says Axa Investment Managers (Axa IM).
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Asian high yield debt should continue to appeal to investors as a robust addition to portfolios due to several factors: a supportive regional growth story, as a route to take advantage of opportunities in China, and as an attractive alternative to global high yield.

“Given the volume of global bonds carrying low – or even negative – yields, Asian high yield debt has offered yield-hungry investors a route to returns that is too meaningful to ignore,” said James Veneau, head of Asian fixed income at Axa IM.

But, to continue to capitalise on the more appealing segments of the sector, bondholders need to adapt to an evolving market environment.

For example, increasing rates volatility and emerging signs of uneven recovery across the region have raised some red flags, Veneau said, adding that these were compounded by a surge in US yields in the first quarter.

At the same time, the Asian credit story has witnessed a withdrawal of support and lack of transparency among some Chinese names – which comprise a sizeable share of the overall sector.

“This is posing somewhat of a challenge to the Asian high yield asset class as it begins to take on the added volatility and uncertainty of these actual and potential fallen angels,” explained Veneau.

On the one hand, he said, many relative value high yield plays are still in China, where volatility will likely remain. On the other, although opportunities to diversify outside of China are important, especially in new issues, the appeal of adding exposure to high quality, oversold Chinese issuers cannot be overlooked, he added.

Making good choices

Given this dynamic investment environment, investors must ensure they do sufficient analysis to find mispriced credits.

This involves, for instance, identifying financial flexibility, said Christy Lee, senior portfolio manager, fixed income, at Axa IM.

“Companies with high cash balances, access to bank lines and debt capacity at their rating level stand out, as do highly rated, defensive names, which can serve as good portfolio anchors,” she explained.

Investors should also look for companies with an improving balance sheet trajectory. Veneau said those issuers that apply leverage to grow and use cash flow improvements to pay off debt tend to get ratings upgrades agency and spread compression from the market.

“Ultimately, the nature of Asian high yield securities requires an active, selective approach on several dynamics of an issuer,” he added.

Fuelling performance

For investors that do effective bottom-up credit research, the key elements of the asset class will likely help it continue to contribute positively to portfolios for the foreseeable future:

For example, despite unpredictability over when and where Covid-19 cases will make a resurgence, Asia’s economic outlook is generally still bright. And amid the rising value of global trade, for instance, there is good reason for optimism for a boost to corporate earnings in the region.

In addition, despite recent credit events in China, the domestic property sector remains stable, according to Moody’s Investors Service – which also forecasts solid sales growth and continued access to financing for rated developers, both onshore and offshore.

Further, added Lee, Asia’s relatively reliable growth path has enabled it to deliver higher yields and returns than global peers. “This is based on several key factors, including lower default rates historically compared with US high yield, higher average yields than most other type of global bonds, and a much shorter duration profile.”

Part of the Mark Allen Group.