T Rowe Price favours Chinese fixed income assets on the back of the government’s sudden easing of Covid-19 restrictions.
“We continue to believe that Chinese corporate dollar bonds offer attractive opportunities to gain convexity to the China reopening and economic recovery trade,” said Sheldon Chan, portfolio manager for Asia credit bond strategy at T Rowe Price.
“Convertible bond opportunities also offer additional return potential if growth accelerates ahead of expectations.”
China’s recovery is likely to stimulate a rise in domestic demand, which will generate interesting investment ideas in sectors such as real estate, consumer products, retail and logistics, said Chan.
Over the long term, he also favours companies involved in energy transition and infrastructure, which are aligned with government policies and objectives.
Spillovers from China’s exit from its zero-Covid policy would also benefit economies around the world, but Chan expects them to be more gradual and take time to materialise.
For example, the Hong Kong property and retail sectors are likely to benefit from the return of mainland Chinese tourists. Meanwhile, south and southeast Asian markets with exposure to tourism such as India, Indonesia and Thailand are also likely to take advantage when Chinese visitors starts to travel again, Chan added.
Although the Asia bond market was no exception from other asset classes insofar as it endured a difficult year in 2022, Chan believes the market remains a high quality segment within emerging market fixed income, with a long-term track record of attractive risk-adjusted returns.
While the Chinese real estate sector used to be a significant part of the Asian bond market, investors should now also be looking out for bonds issued outside the second largest economy.
Chinese policymakers have introduced support measures for property developers through the 16 point measures brought in late last year, but it is Chan’s view that other policies are needed to rejuvenate the property sector.
“We believe residential property pre-sales will be a key indicator to watch. If the pre-sales can increase to a healthier level, it would boost investors’ confidence in developers’ cash flow and liquidity,” Chan said.
“We do not expect a v-shaped recovery and believe that the property sector is expected to become less important to the Chinese economy over time.”
At the same time, T Rowe Price continues to see growth in the Asian credit markets, driven by growth in issuance outside of China.
“In particular, we continue to expect companies across the region will look to issue USD bonds to diversify their funding sources or explore markets to raise financing for energy transition and decarbonisation plans,” Chan added.
“This will provide investors with a means to gain a diversified exposure to Asian credit markets.”
