After several challenging years due to China’s property crisis, Asia high yield (HY) bonds delivered their strongest performance in the first half of 2024 than in any comparable period since the global financial crisis in 2008, according to Omar Slim and Andy Suen, co-heads of Asia fixed income, and their team at PineBridge Investments.
With a total return of 10.5%, Asia HY also outperformed other major credit markets, including US high yield (+2.6%) and global high yield (+3.2%), data from key JP Morgan and Bloomberg indices shows.
Default rates are also likely to be lower than among US high yield bonds during the next two years, “supported by the region’s healthy macroeconomic backdrop, issuers’ robust access to cheaper local funding channels, and a fairly distributed maturity schedule,” said Pinebridge.
The Chinese property sector crisis caused Asia HY corporate defaults to spike to 16.8% in 2022 and 10%in 2023. With the sector now much smaller, PineBridge expects default rates to moderate to an estimated 4.5% this year.
“Moreover, the rest of the market has remained healthy. Excluding China property, default rates in the asset class stood at a mere 0.3% in the first half of this year,” Slim and Suen wrote in a recent paper.
In addition, the Asia HY market is more diversified and offers higher yields relative both to historical averages and developed market HY bonds. Indeed, with levels at the higher end of their 10-year historical range – at 12.3% (4.4 percentage points higher than the yield for US HY as of 28June 2024) — “Asia HY is one of the few market segments that still offer potential for spread compression,” they wrote.
More specifically, PineBridge argues that the recent supportive measures for the housing market in China are positive steps toward reducing the risk of a further deflationary spiral, but believe more action is needed to stabilise the property market.
But they remain cautious on the outlook for the sector, preferring opportunities in select industrial companies in China which are “benefiting from pro-growth policies and the loose monetary policy stance, which is bolstering access to cheap funding”.
Outside of mainland China, Slim and Suen favour Macau’s gaming sector, where fundamentals are still improving following the territory’s Covid reopening, and identify good prospects among select Indian companies, especially renewable energy, supported by structural tailwinds and the country’s robust economic expansion.
“In this dynamic environment, active managers with disciplined investment processes are well-positioned to generate alpha,” concluded Slim and Suen.
