Posted inFixed Income

High yield managers look beyond China property

High yield managers are looking instead at Macau gaming, Indian renewable energy and Indonesian corporate credits.
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Macau gaming, Indian renewable energy and Indonesian corporate credits have emerged as the favourite options for high-yield fund managers, research from Morningstar shows.

The Asian high yield bond market has endured a difficult few years following macroeconomic headwinds and idiosyncratic risks in China’s property sector.

Despite periods of brief optimism such as the credit rally that occurred at the back end of 2022 following China’s reopening, the asset class’ performance has been lacklustre at best.

This has been reflected in fund flows as well with the category experiencing net outflows during this period, albeit it did record inflows during the first quarter of this year (this was reversed during the second quarter), Morningstar data show.

Practically no asset managers are currently overweight high yield with nearly all of them arguing that current spreads do not sufficiently compensate investors for the recession risk.

At the same time, primary issuance has effectively ground to a halt. According to Morningstar data, the $3.5bn raised during the first five months of the year was less than half what was raised during the same period last year and amounted to just 5% of the overall Asian US dollar bond supply this year.

Asian issuers have instead turned their attention to the local bond market or domestic bank loans due to the higher cost of issuing US dollar-denominated debt.

This shift has only been hastened by interest rate hikes in the US, which have made issuing US dollar denominated debt more expensive.

Despite this difficult backdrop, Morningstar notes that there are pockets of opportunity. Gaming credits in Macau have benefited from a rebound in visitors as well as the renewal of gaming licences last year.

Meanwhile, India’s renewable energy sector has benefited from supportive government policies and the shift towards ESG, while Indonesian corporates generally are benefiting from the favourable macroeconomic backdrop.

Morningstar also noted that a number of asset managers had got round the difficulties currently plaguing the sector by allocating more towards investment grade. Typically, high-yield fund managers are allowed to invest between 20% and 30% of net assets outside their core mandates and they have taken advantage of the high yields and relatively low default risk on offer in investment grade credit.

“Asset managers have stated their liking for this segment’s attractive carry, shorter duration and adequate supply, as well as its defensive nature amid the uncertain macroeconomic backdrop,” Morningstar wrote.

Part of the Mark Allen Group.