Sheldon Chan, T Rowe Price
Although the Chinese property sector has always been a significant part of the credit market, especially in the high yield segment, investors should also look at other Asian credits, such as those in Indonesia and India, said T Rowe Price at its 2022 Mid-Year Market Outlook Media Briefing which FSA attended.
Speaking at the event, Sheldon Chan, co-portfolio manager, Asia credit bond strategy, T Rowe Price, said opportunities lie in the Asia investment grade bond market amid volatility.
“In the period of global market turbulence, Asia investment grade actually holds up pretty well, on a par if not outperforming, the developed market investment grade markets.”
Chan noted that only about 20% of the opportunities in the region lie in China, with the high yield property sector contributing 1.4% only, the asset manager quoted data from the JP Morgan Asia Credit Index.
T Rowe Price also noted that for the first time, the net asset value of Asia US dollar credit new issuance increased year-over-year in 2021, while that of China credit new issuance decreased.
Compared with the peak in 2017, the volume of new issuance in the Chinese credit space has declined over 60% last year as well, showing that non-China issuance is slowly building momentum.
Indonesia is a winner
In an uncertain top-down environment, Chan highlighted Indonesian sovereign credits as one of the major opportunities.
“Indonesia stands out as one of the winners within the Asian region. The economy and macro situation is benefitting from trade thanks to the higher commodities prices,” said the portfolio manager.
“Policymakers in Indonesia have also gained credibility for their track record for running a prudent fiscal management.”
He added that Indonesian sovereign bonds have traded with lower volatility as compared with previous cycles.
On the corporate side, Chan also believes that Indonesian companies are benefitting from the ample liquidity in the banking sector that in turn helps their access to capital.
Chan also highlighted the India high yield sector as another sector given the recent market volatility.
“Recent price dislocations in the India high yield sector have reflected the market pricing in some of the more challenging aspects, including high domestic interest rates and weaker foreign exchange backdrop,” said Chan.
“The selling can get overdone, and we still believe the renewables industry remains strategic for India, and will continue to benefit from supportive policy direction.”
When dislocations occur, T Rowe Price believes these present some of the tactical entry opportunities.
While the rest of the Asia credit bond asset class remained relatively resilient during the turmoil, T Rowe Price believes volatility is there to stay in China’s high yield property sector.
Coming out of the property default crisis in 2021, the investment manager expects to see further volatility in the short term, followed by a longer period of consolidation.
“We expect that China’s property construction industry will switch to a more utilitarian model, dominated more by state-owned developers, with private sector companies playing a smaller role,” said Chan.
In the long term, the portfolio manager believes investors should welcome a healthier property sector backdrop with stronger balance sheets for the survivors.
When asked whether it is a suitable entry point to reengage in China real estate, Chan said the recovery is case-by-case.
While many names offer attractive double-digit yields, Chan believes only the better-quality names or those which demonstrate staunch onshore support will survive.