Amid a relatively stable political environment across Asia Pacific, plus solid credit fundamentals and technicals, the UBS Asset Management Asian fixed income team believes that Asian high yield is primed to continue to perform for the rest of 2024.
Already, the Asian high yield market has had a strong start to the year, delivering over 9% returns by the end of May 2024, according to the JP Morgan Asian Credit Non-Investment Grade Index (USD).
“The high carry of the sector will likely be a key driver where many sectors and issuers are still offering over 10% yields and low default probability,” said Raymond Gui, managing director and head of fixed income portfolio management, Asia, UBS Asset Management, in a recent paper.
There has also been a recovery in new issuance volume in Asia credit in recent months with year-to-date (YTD) issuance now at around $70bn, according to Citi Global Investment Bank, data as of June 2024.
Recovery is even more notable in the high yield market with YTD supply of $6.2bn, up 114% YOY, according to the same source, which has already surpassed issuance volumes of the full year of 2023.
Diversified market
“The Asian credit universe now is more diversified and balanced in terms of sector and country exposures,” said Gui (pictured). “There are now significantly more alpha opportunities in a more diversified set of exposure across the market to generate outperformance over the benchmark.”
Yet, credit spreads remain wider than the historical average providing opportunities for capital gain as credit spreads tighten.
Moreover, a small allocation to low cash price China property bonds trading at cheap valuations provides up-side potential with limited down-side risks could contribute to outperformance of the asset class.
“Our Asian high yield fund is well-positioned to capture diversified sources of returns in a turning asset class,” said Gui.
Sector preferences
Among Asia financials, Gui thinks there is significant dispersion, for instance, while bank AT1s look to be fully valued, they can be relatively low volatility-carry bonds given the unique nature of regulatory attitudes towards banks in Asia.
He also identifies insurance debt which offer opportunities for bottom-up investors to take advantage of the idiosyncrasies of different insurance regulatory regimes across Apac.
Across India non-bank financial companies (NBFCs), credit growth has been strong, especially in the unsecured loan space. Hence, the regulator has become quite hawkish to pre-empt any buildup of risks in the sector.
“Therefore, UBS AM is positioned in the higher quality issuers while we analyse other NBFCs to capture any tactical investment opportunities,” said Gui.
Within India high yield, Gui sees pockets of value, including some commodity producers and renewables, where the regulatory environment is supportive.
Meanwhile, he believes the fundamentals in Macau gaming are looking good with gross gaming revenue continuing their post zero covid recovery. Companies are generally focused on paying down debt, so the short term direction is looking positive from credit perspective.
“We have largely been positive on this sector since the early days of China re-opening, which has been beneficial to our portfolio, and continue to remain so,” said Gui, although he is wary of regulatory surprises in the sector.
Hong Kong is going through some cyclical as well as structural changes which are having negative impacts on sectors such as property. But, Gui sees Hong Kong as a mature market with experienced management teams and companies which have gone through deep cycles in the past.
“We do not expect defaults in the near term and are seeing interesting investment ideas as some companies are trading at stressed levels despite comfortable liquidity profiles, solid bank financing access and creditor-friendly corporate actions,” said Gui.
China restructuring
In the China property sector, there have been attempts by the government to stabilise the market with measures such as the RMB 300bn affordable housing re-lending facility and recent down-payment and mortgage requirement cuts.
Gui noted that UBS AM is “adequately positioned to capture the potential upside arising from further government measures”.
Nevertheless, it favours companies close to creditor restructuring agreements, and among the remaining non-defaulted issuers, it has generally preferred low cash lines for most issuers in China.
UBS AM also favours China industrials as “a superior risk-adjusted way to take part in China stabilisation story”.
It likes industrial companies that have either paid down debt or refinanced to longer maturities. “There have also been creditor friendly corporate actions like asset sales by multiple companies in this segment,” said Gui.
