Guan Yi Low, Eastspring
The asset manager surveyed 200 institutional and wholesale investors between July and September globally about their appetite for Asian fixed income. Despite the summer being a period of market volatility, 68% of respondents indicated that they wanted to increase their exposure to Asian fixed income over the next 6- to 12-months.
“We are definitely seeing more interest. Asian bonds are broadly seen as a diversifier from other developed and emerging market allocations,” Jean De Kock, fixed income manager and research specialist at Mercer, told a roundtable hosted by Eastspring this week.
US dollar-denominated Asian fixed income, especially high yield credit, offers high income benefits, as well as diversified sector exposures and growth drivers, he said. Kock also pointed out that China’s fixed income assets are significantly under-represented in indices considering the proportion of China’s GDP in global GDP.
The widely followed JP Morgan Asia Credit index is down 2.2% so far this year, according to FE fundinfo. However the JP Morgan Asia non-investment grade index, a measure of Asian high-yield bonds, has plunged 7.8% on concerns about the China property sector.
Guan Yi Low, head of fixed income at Eastspring Investments, told the roundtable that when investors are considering the Asian high-yield sector, they are typically focusing on the Chinese property sector, which makes up about two-thirds of the sector, and has been under the spotlight due to recent volatility caused by default anxieties since Beijing imposed more stringent limits on their leverage.
“But this is hardly anything new to investors, as the sector has been the target of policy tightening several times during the past 10 years. The latest round has been more intense though, the three redlines policy announced late last year has been pressing developers to deleverage,” she said.
Moreover, in the long-term the measures should be beneficial. “It is good for the fundamentals of the sector, because at the end of the one-year policy exercise, the developers should all have fewer liabilities, and stronger balance sheets. They are being forced to get back on the right track,” said Low.
She also pointed out that most of the property developers that have already defaulted on offshore bond payments are “quite small in size”, and anyway would have struggled to refinance. For the sector as a whole, “the fundamental credit analysis still works,” she said.
Low reckons that concerns about the sectors’ volatility are misplaced, as historically the volatility isn’t high compared with global emerging credit markets, and is more similar to global developed markets.
As a result, Low believes that investors should take advantage of the current “stress” and take advantage of a “once in a decade opportunity”.