Although individual credit analysis is essential is this unstable environment, there are compelling macroeconomic and market-technical reasons that support Asian fixed income, according to Cecilia Chan, chief investment officer, fixed income, Asia-Pacific at HSBC Global Asset Management.
“Asia and its economies are recovering faster from the coronavirus pandemic than the rest of the world, weak inflation will allow continued low interest rates and therefore low deposit rates which will encourage investors to seek higher yielding corporate bonds, and further fiscal stimulus will require more government bond issuance at attractive rates,” she told a media briefing on Monday.
“[Moreover], the fundamentals of Asian [companies] are expected to outperform many global peers and we expect the default rate to be maintained at a lower level,” she said.
Chan highlighted the rising productivity and activity levels in China, which should lead to a pick-up in consumer confidence and spending, which in turn should bolster the corporate sector and improve its overall credit quality.
“China’s recovery is especially important for Asia fixed income, because China bonds make up 52% of the asset class,” she said.
However, Chan warned that the effects of global coronavirus lock-down measures are likely to “last longer, extend wider and penetrate deeper” than the initial impact of the global financial crisis, so historically high credit spreads will not normalise as rapidly.
“But, high yields will be attractive for investors requiring income, and will also be the main component of positive returns, rather than capital appreciation,” she said.
Fund launches into China
Chan’s positive outlook coincided with HSBC GAM’s launch of two seasoned Asia bond funds, and its publicising of another launched last month into mainland China through the mutual recognition of funds (MRF) scheme.
The $1.06bn Asia High Income Bond Fund, managed by Ming Leap and Alfred Mui, which comprises a mixture of investment grade and sub-investment grade bonds, has generated a 5.89% three-year cumulative return, under-performing the average return of its US dollar fixed interest sector, according to FE Fundinfo data.
However, the $1.89bn Asia Bond Fund, a mainly investment grade product managed by Chan since 1996, has achieved 9.98% over the same period, beating the 5.77% return of its Asia-Pacific fixed interest peers; while the $815m Asian High Yield Bond Fund, managed by Chan and Mui, has also done better than its (USD high yield) sector average, posting 7.74% compared with 1.25%.
All three funds were unable to escape the sharp fall in bond prices between 9 March and 23 March, but only the higher risk Asian High Yield Bond Fund is more volatile than its peers, at 9.23% versus 8.95%, annualised over three years, according to FE Fundinfo.
The Asia High Income Bond Fund was officially launched into the mainland in April, while the Asia Bond Fund and the Asian High Yield Bond Fund are now made available onshore for the first time.
HSBC Gam applied to the CSRC to sell the Asia High Income Bond Fund via the MRF in March 2019, and submitted applications to distribute the High Yield Bond Fund and Asian Bond Fund the following June. The CSRC gave its approval for the sale of all three funds in February this year.
The MRF between mainland China and Hong Kong is a scheme jointly created by the China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission in July 2015. Under the scheme, eligible mainland and Hong Kong funds can be distributed in each other’s markets.
HSBC Jintrust Fund Management is the master agent of the three funds in mainland China and they will initially be distributed through HSBC Bank (China) and subsequently by other onshore distributors. Distributing share classes of the three funds aim to pay monthly dividends to generate an income stream.
Mui believes all three products should appeal to China investors, not least because offshore Asia – including China — bond yields are so much higher than yields available from onshore fixed income securities.
“Onshore China property bond yields are about six percentage points lower than yields paid on US dollar-denominated issues of the same borrower,” he told the media briefing.
“Cheaper onshore financing options also helps the technical position of the offshore market as new supply should be muted,” he added.
HSBC Asian Bond*, Asian High Yield** and Asian High Income Bond*** Funds vs sector averages
