Joep Huntjens, NN Investment Partners
“Valuations for Asia high yield bonds are attractive compared with US equivalents,” said Joep Huntjens, NN Investment Partners’ head of Asia fixed income on a recent conference call.
Asian single-B credits yield around 90 basis points more than US single-B issues and BB-credits about 70bps higher, which is a wider differential than average during the past decade. NNIP forecasts returns of 5% to 7% for Asia hard currency bonds this year.
China property and Indonesian corporate issues, in particular, offer potential for spread compression, reversing the widening of yield spreads over US treasuries amid concerns about a synchronised global economic slowdown, tightening liquidity, the Sino-US trade dispute and fears that credit deterioration in Argentina and Turkey might infect other emerging markets.
Both international and domestic factors are behind NNIP’s optimism.
The Dutch fund manager, which has $3.5bn of Asia fixed income assets under management, believes that the US will not slide into recession this year or in 2020, with the Federal Reserve adopting a cautious, flexible interest rate policy that should maintain US GDP growth at 2%.
The Sino-US tariff tit-for-tat is likely to be resolved, largely because China has a strong incentive to reach a solution, according to Leo Hun, senior portfolio manager, emerging market debt at NNIP.
“China is de-leveraging as its economy slows and needs to preserve financial market stability, so policy makers don’t want to cope with external distractions,” he said.
Property bond revaluation
Clement Chong, the firm’s senior credit analyst for Asia credit, stressed the domestic factors supporting China property issuers.
Inventories have fallen to around 10 months in the largest cities, compared with 20 months during the 2014/15 property market downturn. He pointed out that the authorities have introduced measures such as reducing down payment thresholds and lending rates, which should support a market recovery.
Nor should investors be anxious about new bond issue supply or defaults, said Chong. He expects gross supply in the offshore market to be 20% less than last year and net supply to decline 50%, as property companies refinance on more attractive terms onshore. For the same reason, China bond defaults should fall: last year, 119 onshore corporate issues defaulted, more than triple the 35 cases in 2017, according to China research firm Wind Information.
NNIP’s sanguine outlook for Asia bonds might mean a shift in the main holdings of its $4.1bn Emerging Markets Debt (Hard Currency) Fund as at 30 November 2018. Only one of the top ten is an Asia issue – a 2.7% weighting to the 1mdb Global Investments 4.4% 2023 issue.
The fund has a 21.38% five year cumulative return, compared with 27.75% for its benchmark JP Morgan EMBI Global Diversified index.
