Economic recovery in the region, supportive policy makers, improved credit matrices, relatively low defaults rates and the evolution of sectors that will provide new opportunities, should combine to support Asian fixed income.
“On a risk-adjusted basis, Asian investment grade and high yield credit offer better value than comparable emerging market equivalents; that is, they provide higher returns as a proportion of volatility,” Amy Kam, head of Asia credit told a media webinar last week.
Asian bond funds attracted $2.815bn of net inflows in Hong Kong between the start of April and the end of August, according to Hong Kong Investment Funds Association data.
Source: Bank of America Merrill Lynch Global Research, ICE Data Indices
Gam Investments believe that global economies are either at a repair or early stage cyclical uptick phase, which should be constructive for risk assets into the year-end and in 2021.
“Asia is the best emerging market region against this backdrop, with superior economic performance, growth potential, industry mix and diversification prospects,” said Kam.
“Corporate leverage has unsurprisingly trended up on a gross basis, but net leverage ratios are stable, with Chinese property companies [which comprise at least 40% of the Asian credit market] generally improving their net interest margins,” she said.
Although average company revenues have fallen about 18% year-on-year, “that compares favourably against other emerging market companies, due Asia’s industry mix of technology and property. and lower oil sensitive sectors,” she said.
Primary market activity is likely to remain elevated as companies refinance more expensive debt, but market liquidity is sufficient to absorb new bond issuance as a result of central bank monetary easing and lower interest rates, according to Kam.
Asian default rates, which are typically lower than in other regions, are stable. Kam forecasts that they will end the year at 3.5%, compared with 4.6% in Latin America, 3.9% in emerging Europe, and 2.6% in the Middle East/North Africa.
Her favourite sectors are the evolving industries of green infrastructure — especially in India — and technology, including electric vehicles and batteries. Her top country picks are China, Korea and Taiwan.
Kam is the lead manager of the GAM Asian Income Fund, whose biggest sector weighting is property (30.1%) — which is less than the index — followed by financials (18.7%) and industrials (11.8%), its factsheet shows, and top holdings include bonds issued by Yunda Holdings, a Chinese logistics firm, and Tingyi, China’s largest noodle producer.
Kam’s major concerns are the Sino-US relationship, which she expects will likely remain tense, and China’s 14th five-year plan and carbon neutrality pledge, which might “paint a less supportive picture for emerging market economies in general”.
Moreover, “a rapid rollout of Covod-19 vaccine worldwide may see China and North Asia underperform and erode their edge over other markets in recovery,” she said.
