India’s corporate high-yield segment is rapidly expanding, said Oon Jin Chng, credit research analyst, who expects the trend to continue.
“Credit is less about the overall economic environment and more about strong corporate fundamentals. Corporations can do well in a mediocre economy, and that seems to be what’s happening,” added Michael Buchanan, head of global credit.
The fund house believes that the Asian high yield market is not overvalued.
“Asian high yield bonds still offer value, especially when we look at the spread pick up over the US BB-rated high yield corporate bonds. Today, Asian high yield bonds offer approximately a 219 basis points pick up over US BB high yield bonds compared to the three-year median of 229bps,” Chng said.
Cautious on China property
The reform steps taken by China to put the country back on a long-term growth trajectory could result in more opportunities, the wholly-owned affiliate of Legg Mason said.
The firm takes a cautious and selective investment approach while investing in the Chinese property sector. Chinese property has the highest weighting in JP Morgan’s Asia Corporate Index (JACI), which is commonly used as the benchmark for the Asian high yield asset class.
“Where we draw some comfort is the fact that the property developers we find attractive are typically the larger developers within China’s very large and fragmented sector. We prefer the larger Chinese property developers with long operating track records, operating cash flow visibility and strong access to capital.”
First State Investments and Aviva Investors are following a similar tactic while investing in issuances from Chinese property developers because the sector is facing a slowdown in sales and prices.
Governance risk
Chng cites corporate governance as one of the key challenges while investing in Asian high yield.
“Although the market has developed quite significantly in the last five years, the Asian high yield market is still relatively young and issuers are still unaccustomed to the international credit market.
“While we have seen progress, but we believe there is more wood to chop on this front.”
