Tokyo
Asian high-yield dollar bonds have eked out gains for investors in recent days as a growing number of credit analysts see value in the asset class after the worst half for the debt since 2011.
Debt from Asia’s weaker firms has lost 5.9 per cent so far this year and under-performed globally, amid heavy supply early in the year and heightened concerns about Chinese defaults. But the past three sessions have seen some gains, indicating that investors may be back in the market hunting for bargains.
Analysts at Bank of America Corp last week joined peers at JPMorgan Chase & Co. in pointing to buying opportunities in some Asian company notes after a recent sell-off. With expectations for a slowdown in Chinese property sector high-yield deals after new regulatory curbs on issuance, and a reversal in benchmark US Treasury yield gains, credit analysts including Todd Schubert at Bank of Singapore Ltd are more optimistic for the debt’s outlook in the second half. Aberdeen Standard Investments Ltd also likes Asian high yield at current prices.
“Relative to the US, high-yield valuations in Asia offer entry points that have not been available to investors for over four years,” said Paul Lukaszewski, head of Asian corporate debt and emerging market credit research at Aberdeen Standard in Singapore. “We believe current valuations are oversold and have used the sell-off to increase our allocation to Asia high yield in both our Asian and Global EM Corporate bond funds.”
Spreads on Asian high-yield bonds currently offer investors a pickup of about 300 basis points over those of US junk notes, the most since the first quarter of 2015, ICE BofAML indexes show. The spillover effect of higher onshore defaults in China and outflows from that country’s investors may, however, delay a tightening in Asian yield premiums, according to BofA.
Things may also still get worse before they get better, according to analysts. But with Asian junk bonds now yielding about 9.3 per cent compared with 6 per cent at the end of 2017, it’s getting harder to lose money on the notes from here. BofA prefers Chinese high-yield property names and Indonesia commodity companies.
The growing divide between investors can be seen in a recent BofA investor survey, details of which were released last week. Fifty-three per cent of respondents in the survey expect the default rate in the Asia dollar-bond market to remain low at 2 per cent to 3 per cent or even lower, while 47 per cent see it climbing to 3 per cent to 5 per cent. Except for the period of the global financial crisis, the default rate in Asia has been under 3 per cent, according to BofA.
Andy Seaman, chief investment officer at Stratton Street Capital LLP, prefers investment-grade notes as the Federal Reserve tightens liquidity.
“In a tightening cycle, high yield usually does badly as we almost always follow a tightening cycle with a US recession,” said Seaman. “We don’t like Asian high yield, or US high yield or euro high yield. Those markets don’t really interest us until yield compensate for the risks and that is a long, long way from here.”
