Jimond Wong, Manulife Asset Management
“Three major rating agencies already have Indonesia on investment grade. So this opens the door for a lot of Indonesian corporate issuers to take on the capital market,” Wong said at a recent media briefing in Hong Kong.
In May, S&P raised Indonesia’s credit rating to Bbb-, making it the first time since the Asian financial crisis the country was rated as investment grade by three credit rating agencies. Fitch upgraded Indonesia to Bbb- in 2011, while Moody’s gave the country a rating of Baa3 in 2012.
“A lot of institutional investors such as pension funds or sovereign funds used to stay away from the country. But with the country investment grade now, a lot of investors will put their money in Indonesia,” Wong said.
Besides its investment grade rating, Wong expects more bond issuance because of the government’s move to cut interest rates. As rates fall, corporations find more attractive credit terms. In August, Indonesia’s central bank cut interest rates to 4.5% from 4.75%.
“And they have further room to cut interest rates, which will benefit a lot of corporates in the country.”
Indonesia has also been spending on infrastructure, which means a wave of new companies, other than those in the coal and mining sector, are expected to issue bonds.
Yields are attractive in the country, particularly for Indonesian US dollar-denominated high yield bonds, he said.
“We are talking about 5%-6%, versus the 3%-4% yield in China.”
Indonesia accounts for the second highest country exposure (12.47%) of the firm’s Asia Total Return Fund, right after China (31.43%), according to the fund factsheet. The portfolio is managed by the firm’s fixed income team, which Wong is part of.
High yield warning
However, Wong warned on risks that come with more issuers in the high yield space – not just in Indonesia but in Asia as a whole.
“That means both good and companies will come into this space. So this year we will see more defaults in the region.”
An example of a sector that investors should be cautious of is Chinese industrials. “A lot of these names are unlisted, unrated and have little transparency in their financials.”
Nonetheless, high yield default rates in the region still remain low, Wong said. Citing data from Moody’s, the high yield default rate in Asia is just 1.5%, which is lower than the global average rate of around 3%.
The three-year performance of the Manulife Asia Total Return Fund versus its sector
Source: FE Analytics, Note: All NAVs have been converted to US dollars for comparison purposes.
