Stephen Chang, Pimco
Domestic deleveraging, a slump in consumer confidence and the persistence of the trade dispute with the US will dampen growth in China again this year, argues Stephen Chang, portfolio manager.
“Moreover, geopolitical conflicts and escalation of trade tension beyond tariffs measures will be a key risk that can disrupt markets. The possibility of a US recession also needs to be considered, although it is not our base case,” he told FSA.
Nevertheless, Chang identified specific opportunities in the three major issuers of hard-currency Asia emerging market bonds: China, India and Indonesia.
“Apart from the leverage ratios and interest coverage, for cyclical names we will model closely their growth and debt dynamics, and will monitor short-term debt closely for high yield issuers to ensure there are available channels for these companies to refinance,” he said.
Sector choices
The property sector in China has bellwether issuers trading at or close to distressed levels, Chang said. He believes that bottom-up credit analysis is crucial to avoid weaker issuers and those with a heavy refinancing schedule ahead.
Meanwhile, China’s expected inclusion into the Bloomberg Barclays Global Aggregate Index should increase demand for onshore Chinese bonds, which provides an opportunity for foreign investors.
Elsewhere, India faces a general election this year, and Chang fears that the ruling Bharatiya Janata Party might resort to populist measures after a string of losses in the recent state elections. He is also anxious about the level of nonperforming loans in the banking sector and the appointment of a new Reserve Bank of India governor.
He is less worried about a recent spike in inflation and a temporary liquidity squeeze at non-bank financial companies (NBFC).
Shorter-dated issuance from leading banks in India and high quality quasi-sovereign names should be resilient and could provide an investment opportunity if spreads widen. This could happen due to volatility stemming from the general election and concern over NBFC stress, according to Chang.
In Indonesia, there is also a general election this year, and Chang fears that markets may not have priced in a defeat for the incumbent government. A persistent current account deficit always makes Indonesian assets and the rupiah vulnerable to a strong dollar. But solid GDP growth, a healthy banking system and fiscal discipline support Indonesia’s investment grade credit rating, he argued.
He likes dollar-denominated sovereign and quasi-sovereign bonds, and although neutral toward the currency, is avoiding Indonesian domestic debt.
Elsewhere in Asia, Chang is staying clear of Philippines external bonds now that local banks no longer have excess dollar liquidity to support the issues, and is underweight the peso as inflation picks up. Other Asian currencies, such as the South Korean won and Taiwan dollar, are unattractive because of their low carry.
Overall, Chang believes some recovery from last year’s poor emerging market bond performance is likely. The Bloomberg JP Morgan Asia Dollar Index ended last year 4% weaker, but has shown a sharp rally since the start of 2019.
“With the US Fed likely to be less aggressive this year in normalising rates, along with attractive valuation both from an outright and relative value basis in Asia credit, we see a strong possibility of flows returning to emerging markets and Asia.” said Chang.
But, Chang isn’t ready to increase “risk-on” positions. Instead, he is focused on identifying country-specific opportunities and selecting credit positions where he sees value and remote default risk.
Pimco GIS – Emerging Asia Bond Fund vs Asia-Pacific fixed income sector
Source: FE Analytics. In US dollars. Note: The fund is managed by Michael Gomez and Abhijeet Neogy. Chang’s appointment as manager of the fund is pending regulatory approval, according to Morningstar.
