As the role of credit shifts from being tactical towards playing a greater part within strategic asset allocation, the momentum is with Asian names. This is according to Neeraj Seth, head of Asian credit at BlackRock, speaking during a webinar hosted by Fund Selector Asia on the region’s high yield potential. Click here to get the webinar replay.
The appeal stems from a mix of fundamental and valuation perspectives. These are based on a range of factors, including solid fundamentals; spread widening across the spectrum; supportive economic data; and markets remaining in a structural bid for yield.
As a result, Seth believes current spread and yield levels present increasingly attractive entry opportunities for Asian high yield, especially relative to counterparts in the US and Europe.
And various signals suggest this is set to continue:
- Asia’s relatively early rebound from Covid-19 in comparison with other parts of the world
- The knock-on impact of the global fiscal and monetary push ever, spurring issuance and supply pressures elsewhere in the world
- Asia’s historically low default rates
- Premiums to reward investors driven by the heterogeneity of the region rather than fundamentals
- The potential to generate resilient income and attractive risk-adjusted returns
Learn more about BlackRock’s Asian High Yield Bond Strategy here
Dispelling market myths
The risks to investing in Asian high yield are often misunderstood. Yet concerns about default rates, market liquidity and diversification opportunities should not be hurdles for investors to allocate to the asset class.
In addition to the relatively muted default risk for the region – both previously and estimated over the next 12 to 18 months – Seth says it is important to ensure limited exposure to vulnerable sectors.
Chart 1∗
Further, investors who are flexible can navigate default names to generate alpha via opportunistic trades. For example, since a credit that defaults will typically display issues around 6 to 18 months earlier, active portfolio management can benefit from the price volatility, rather than solely focus on drawdowns.
At the same time, analysing the size of the (roughly) US$300bn Asian high yield market – in comparison with the US$1.8trn US market for this asset class[1] – creates a misperception in terms of liquidity. Ultimately, says Seth, investors are getting paid for that risk, evidenced by the region trading at more than 200 basis points wider than the US.
When it comes to diversity in Asian high yield, rather than be overly concerned about concentration risk in Chinese names, investors need to keep in mind that China is the world’s second largest bond market. As a result, Seth says investors need to accept that China is going to comprise a bigger part of any fixed income or credit portfolio going forward.
There is also a growing local bid for Asian high yield debt, in turn leading to lower volatility during global downturns or credit events. This demand is expected to absorb the growth in issuance forecast for the rest of 2020, at least.
Nimble credit navigation
In uncertain times for the market and in the credit cycle, being nimble is critical to these and other portfolio management techniques.
The starting point, says Seth, is understanding the risk regime in the context of the overall portfolio. This involves assessing countries and sectors initially, complemented by bottom-up security selection to minimise idiosyncratic risk.
This is based on a continuous and evolving process that blends the return drivers of focusing on the best risk-adjusted income opportunities on one hand and, on the other, sector allocation coupled with security selection for alpha generation.
In today’s landscape, for instance, the economic uncertainty globally is driving a preference for credits with cashflows that are more visible and of higher quality.
Against the current backdrop, therefore, Seth says he likes sectors with a domestic focus and strong demand dynamics, but looks to steer clear where fundamentals appear shaky.
Chart 2ˆ
Sticking with sound strategies
BlackRock aims to capitalise on the opportunity in Asian high yield by taking a multi-pronged approach. This involves:
- High income potential – based on a core allocation to credits with high current income while investing opportunistically to capture capital upside
- High conviction – driven by a desire to maximise returns while managing the downside
- A proven track record – leveraging the firm’s $20bn-plus in assets under management[2] in the broader Asian fixed income asset class, its capabilities span traditional liquid and private credit strategies
This combination creates an effective way to derive short and longer-term benefits – for example, in the near term via a focus on carry and credit dispersion, along with strong risk-adjusted returns from capturing special situations and opportunistic growth opportunities; and, longer term, given the slower growth paradigm, demand for Asian high yield will act as a tailwind that benefits pure high yield corporate strategies.
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