Investors should look beyond the significant challenges in recent months across Asia and in China to a relatively bright outlook for the high yield sector.
Fidelity sees several positive drivers, including the region’s general resilience and the policy pivot by Chinese authorities towards the property sector.
“It is important to not get caught up in short-term sentiment swings. We continue to focus on bottom-up credit selection to avoid areas of weakness and identify the most attractive opportunities,” said Tae Ho Ryu, joint lead portfolio manager of the firm’s Asian high yield and China high yield strategies.
While more credit events are likely to occur, many have already been priced in.
In Ryu’s view, this means the actual impact of a default would be less pronounced, whereas the upside could be substantial. “As such, there are attractive opportunities for long-term investors with the financial strength to withstand such events.”
Inevitably, elevated levels of inflation globally create a risk to all types of assets, with the corresponding rise in interest rates dampening prices.
However, the Asian and China high yield segments are likely to handle the pressure from higher rates more effectively than their peers. This is based on lower sensitivity to changes in borrowing costs, believes Fidelity.
“Encouragingly, we’ve also seen our clients maintain a longer-term horizon and stay invested throughout the turbulence,” said Ryu
In particular, he expects the property segment in China to rebound, given policy support, improving fundaments, healthier sales and greater access to funding. “Lower inflation should also result in a less aggressive tightening of financial conditions.”
China valuations appeal
In general, despite the uncertain macroeconomic climate, Fidelity finds valuations in China to still be attractive.
“With spreads in the Asian high yield universe at levels rarely reached since the global financial crisis in 2007-2008, there is room for spread compression,” said Terrence Pang, also joint lead portfolio manager of Fidelity’s Asian high yield and China high yield strategies.
“Meanwhile, market fundamentals appear reasonably robust,” he added.
At the same time, various risks cannot be under-estimated. For example, China’s dynamic-zero Covid strategy continues to impose additional constraints that hamper the economy’s ability to rebound fully. It is also prolonging supply-chain bottlenecks.
Yet the region is relatively more resilient to these headwinds than the rest of the world, believes Fidelity.
“In addition, China has the wherewithal to roll out further stimulus to boost a domestic economy that the Omicron wave has weakened,” added Pang.