“Low yields in global fixed income increases the attractiveness of Asian credit for quality carry, and we especially like China across the credit spectrum,” Neeraj Seth, told a media briefing on Blackrock’s 2020 Mid-Year Asia investment outlook on Wednesday.
In investment grade, Seth favours “high quality strategic state-owned enterprises (SOEs) and select private companies” among investment grade credits, and in high yield he likes “the real estate sector, based on improving fundamentals”.
China SOE bond issuers are supported by government policies and a recovering domestic economy, and offer attractive yields, while the better quality, non-investment grade property companies will benefit from a recovery in sales and recourse to diversified funding channels, he argued.
Blackrock’s Asia bond funds are “focusing on quality, gauged by the credit ratings and fundamentals of the underlying companies, that is the balance of leverage, liquidity and cash flow,” he said.
Blackrock Asian fixed income mid-year allocation
Source: Blackrock, 2 June 2020
Seth expects bond defaults to rise over the next few months, but he thinks that non-Asian emerging market issues will make up most of them, followed by US high yield (especially from the energy sector), and then Europe and Asia high yield.
“Asia comes last because China is a large part of Asia’s high yield universe,” he said.
Seth oversees the $2.9bn BlackRock GF Asian Tiger Bond Fund, which has generated 8.81% over the past three years, ahead of its Asia-Pacific fixed income fund category average (7.96%), but underforming its JP Morgan Asia Credit Index benchmark (13.40%), according to FE Fundinfo data.
The fund’s annualised volatility of 6.31% is higher than both its peers and benchmark, but Morningstar described Seth in its most recent report on the fund as “one of [its] favourite Asian fixed-income managers”.
The strategy can make off-benchmark local-currency bond and foreign-exchange plays, which may give rise to higher volatility at times,” wrote Morningstar associate director Germaine Share last year.
Blackrock’s confidence in China credit is predicated on the country recovering from the coronavirus pandemic and getting back to work, and the government measures that should help boost economic activity.
“China’s stimulus has been significant, but instead of seeking to replace consumers’ income, it targets specific sectors and industries,” Belinda Boa, head of active investments for Asia-Pacific, said at the media briefing.
According to Boa, net new credit creation reached $730bn in March alone and $1.6trn in the first quarter of 2020, up 29% from a year ago.
“This helped gross capital formation – investment in property, plant, equipment or even software – anything used to produce something else – and is supporting a new wave of construction,” she said.
Other fund managers are also optimistic about China and Asia fixed income. Last week, BEA Union Investment announced plans for a new Asia bond fund and earlier in May Gao Teng launched an Asian high yield Ucits fund, while HSBC GAM made the case for China and Asia credit as it launched three Asia bond products into China through the Mutual Recognition of Funds scheme.
However, Blackrock’s Seth is cautious about the technology, media and telecom sector because of the potential risks from escalating polarisation between the China and the US.
On the other hand, the massive US stimulus packages should cap further dollar strength, which should help not just China but other emerging Asian economies.
“As global activity resumes, the relative growth story should re-attract US investors to higher-growth areas, such as Asia, while a weaker dollar would also bring relief to large US dollar debtors, such as Indonesia, as well as China property companies,” he said.
BlackRock GF Asian Tiger Bond Fund vs Asia-Pacific fixed income sector average and JP Morgan Asia Credit Index