- Asian high-yield bonds have been a favorite among institutional investors for years.
- A recent high-profile example is China’s Evergrande, which weighs more than $300 billion in liabilities and is on the verge of collapse.
- Given the uncertainty in China’s junk bond market, CNBC asked five strategists and portfolio managers: Would you recommend investors to buy Asia’s high-yield bonds?
Asian high-yield bonds have been a favorite among institutional investors for the past few years.
Also known as junk bonds, they are non-investment grade debt securities that carry large default risk – and therefore, high interest rates to offset them.
A recent high-profile example was the debt crisis in Evergrande, China. Burdened with over $300 billion in liabilities, the world’s most indebted property developer is on the verge of collapse. Fears of a wider infection for the industry and perhaps even the economy triggered a global sell-off in September.
Given the uncertainty in China’s junk bond market, CNBC asked five strategists and portfolio managers: Would you recommend investors to buy Asia’s high-yield bonds?
To be clear, China’s real estate bonds make up the bulk of Asia’s junk bonds. As Evergrande’s debt crisis settled, other Chinese real estate developers also began to show signs of stress – some did not make interest payments, while others defaulted on their loans altogether.
Here are the reactions of 5 strategists interviewed by CNBC:
1. Martin Heineke, St. James’s Place
Asia Investment Advisory and Head of Communications
Investors “should avoid the use of leverage on any bond or bond fund at this time,” Heineke strongly recommends, referring to the practice of borrowing money to make investments.
He added that predicting returns in high-yield bonds “is not nearly as clear … and such a strategy could be much riskier than anticipated.”
“The recent sharp selloff in Asian higher yields, with a possible default or restructuring of something, is a good example of that,” he told CNBC.
Heineke also said that investors should diversify globally to manage sector and country risks.
“Last but not least, investors should be well advised to diversify across asset classes, given that fixed interest as an asset class is generally vulnerable not only to default risk, but also to interest rate and interest rates. There is inflation risk too,” he said. Escalating price pressures are “arguably increasing and in my view probably undervalued even today,” he said.
But that doesn’t mean investors should ditch high-yield bonds entirely.
“All this being said, Asian junk bonds have already sold out bullish, sending returns very high, and as long as one is risk conscious, I would suggest looking at the asset class with a well-diversified portfolio. should not be thrown out.”
2.Wai Mei Leong, Eastspring Investments
portfolio manager for fixed income
“With China accounting for 50% of Asia’s high-yield bond market, developments around the Chinese property sector are likely to impact investor sentiment in the near term, but we believe opportunities exist for the discerning investor. ,” said Leong.
While China’s property sector has historically been subject to episodes of policy-driven instability, she said, “we believe this time the depth and scale of policy measures have been unprecedented.”
Still, the real estate sector remains an important driver of China’s economy, and accounts for 27.3% of the country’s real estate investments in 2020, while being a major revenue source for many local governments, Leong said.
“The Chinese government would therefore prefer a healthy asset sector rather than seeing multiple large-scale defaults, which could potentially trigger wider systemic risks.”
Leong said that in the long run, China’s growing middle class, coupled with urbanization and the growth of its megacities, will continue to support the property sector’s revenue.
“Investors are likely to re-evaluate their risk expectations towards the Chinese high-yield asset bond sector in the near future,” Leong said.
But China’s campaign to reduce debt within the property sector will ultimately result in “stronger market discipline” among real estate firms, and improve the quality of their bonds.
3. Arthur Lau, Pinebridge Investments
Emerging markets co-lead fixed income and Asia’s leading ex-Japan fixed income
Expect more defaults from the property sector in the near future, Lau said.
Still, he said he doesn’t expect a systemic crisis to result in specific companies.
He also said there would be the possibility of policy easing on the part of Beijing – such as faster approval of mortgage applications and reopening of the onshore bond market to stronger and better quality property developers.
Lau said this would help ease some liquidity concerns.
He also pointed out that select property developers are still able to raise funds through the equity market, such as rights offerings and share placements, as well as property sales.
Lau said that strong developers will emerge “even stronger” out of this crisis, while weaker companies may eventually default.
“Therefore, we cannot stress enough the importance of careful credit selection to pick winners and avoid losers,” he said, adding that his firm expects “a very decent return in the coming six to 12 months.” If investors are able to identify, survive and are able to reduce volatility.”
4. Sandra Chow, CreditSights
Co-Head of Asia-Pacific Research
“In general, we will stick to more conservative credit in China,” Chou said, citing firms that have low debt or have strong government links.
“High yield credits in Indonesia and India have been more resilient and better supported by investors seeking diversification outside China or Chinese real estate,” she said.
“We will not avoid high yields completely, but individual credit selection is very important,” she concluded.
5. Carol Lai, Brandywine Global (investment manager under Franklin Templeton)
Associate Portfolio Manager
Li said Chinese real estate firms issuing high-yield bonds have been sold since August, especially low-quality bonds – but they rallied later, thanks to verbal intervention from Chinese officials.
However, last week there was another sell-off in Chinese real estate bonds, which the portfolio manager said was “the worst ever.”
“It was driven by concern over the transition between hidden debt and high quality [BB-rated] Names that sold fire in all names. Quality names were trading below 80 cents.”
B or BB-rated names are considered rated bonds with low credit quality, and are commonly referred to as junk bonds. However, BB-rated bonds tend to be of slightly higher quality than B-rated bonds.
news over Possible changes in three red line exemptions for mergers and acquisitions It “helped the market to rally a whipsaw, especially in quality names,” he said, referring to China’s “Three Red Lines” policy. This policy sets the extent of debt in relation to the cash flow, assets and capital levels of the firm.
Other encouraging signs for investors include a possible change in issuance reopening in the onshore interbank market and October’s surge in mortgage loans.
“These types of volatile wild market events are not seen often and open up opportunities to be positioned in quality names,” she said. “But caution is still needed as volatility is likely to persist as various asset companies are still in a tight liquidity position.”