China critical risk factor for Asia bonds

Asset Class in Focus

China’s slowing GDP growth is the biggest risk for Asia bonds, argues Arthur Lau, head of Asia ex-Japan fixed income at Pinebridge Investments.

“The most critical factor that may affect bonds in Asia would be the growth trajectory in China. If China’s growth becomes slower than what the market expects, there would be quite a significant negative implication to the asset class,” said Lau during a webinar organised by the firm.

Arthur Lau, Pinebridge Investments

Hong Kong-based Lau, who is also co-head of emerging market fixed income, noted that China is one of the major bond issuing countries in Asia. In 2018, the size of China’s US dollar-denominated bond market was nearly $450bn, while its RMB-denominated market was close to $9trn, according to data from HSBC Global Asset Management.

Lau added that an unfavourable outcome from the trade dispute between the US and China should also put more pressure on other markets in the region, particularly Korea, Japan and Taiwan.

Taking the auto and telecommunication sectors as examples, Lau explained that Korea, Japan and Taiwan supply parts and equipment for production and processing in China, in which the final goods are exported to the US.

However, a negative outcome from the trade talks could benefit other countries.

“There will be countries in the region which can benefit from [a negative outcome], as we believe that production will move away from China to other countries, including Malaysia, Thailand, Vietnam and the Philippines.”

Source: Pinebridge Investments

China accounts for the largest country allocation in the firm’s Asia Pacific Investment Grade Bond Fund, which Lau co-manages, according to the fund factsheet. However, it is underweight much of its benchmark, the JP Morgan Asia Credit Index (JACI) Investment Grade Total Return Index.

According to the fund factsheet, annualised performance since 2015 shows that the fund has underperformed (2.5%) the benchmark (2.7%).

Source: Pinebridge Investments

 

Chinese property sector

Lau also addressed investor concerns about the Chinese property sector.

Last year, at least four Chinese property developers defaulted on their bonds as borrowing costs increased during the government’s deleveraging efforts, according to media reports.

However, Lau singled out “top tier” Chinese property companies as investment opportunities.

“The property market in China is highly fragmented with a lot of players. But if you look at the top bond issuers, they have stronger [balance sheets] and a bigger share in the market.

“While the market is fragmented, the stronger players are able to access multiple sources of funding,” Lau said.

He added that the case is similar across different industries, where headlines have delivered “a lot of attention and noise.

“If you are able to identify those stronger and better players, you can actually find opportunities.”

He added that despite being perceived as a high-risk market, most of the bonds issued in the region are investment grade and are held by institutional investors.

“While market volatility exists, the Asian bond market has become a safe haven and continues to attract institutional investors in the region, which helps create a very decent Sharpe ratio across many different market cycles,” Lau said.

 

Source: Pinebridge Investments

 


The Pinebridge Asia Pacific Investment Grade Bond Fund versus sector since launch

Source: FE. In US dollars. Note: the fund’s benchmark, the JACI Investment Grade Total Return Index is not available on FE. The fund was launched in Singapore in 2017, although its initial launch in other markets was in 2015.

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