Asia hard currency debt tipped to return more than 4%
Asia fixed-income hard currency can still deliver despite a likely rise in US interest rates and a slowing China economy, a forum heard yesterday.
The forum was told that over the next 12 months, the asset class could return at least its current portfolio yield of 4.3%.
As the hard currency version is priced in US dollars, an increase in US rates may well support a stronger dollar, further adding to total returns.
Joep Huntjens, head of Asian fixed income and lead portfolio manager in Asian debt hard currency at NN Investment Partners, made the arguments at AsianInvestor’s 10th Asian Investment Summit in Hong Kong.
Huntjens addressed an audience of asset owners who, by their questions, were sceptical of bonds in general. Pressed by one asset owner in the audience about how much of his personal money was at stake, Huntjens said he owns just two types of asset classes: global equities and Asian fixed income.
To achieve returns that beat the JP Morgan Asian Credit Index, Huntjens said the portfolio has to go long positions that most of the market currently disdains: real estate developers in China and oil-and-gas producers in India.
The China slowdown and recent default situations among some Chinese developers have raised plenty of doubts about the sector. Huntjens said the real-estate market has bottomed out in tier-1 and tier-2 cities. The best-performing part of the segment has been high-yield issuers but the recovery is now priced into those instruments; however, investment grade developers focused on the most appealing cities are attractive.
“Investors exaggerate the risks, and that creates opportunities,” he said. Although the anti-corruption campaign can throw up surprises – requiring portfolio managers to be more diversified – it is good for long-term stability, and the government can manage the economy’s general deceleration. That bodes well for bondholders, as will reforms such as liberalising interest rates.
Another theme Huntjens favours is oil and gas, which due to the fall in oil prices is generally disliked by investors. But Huntjens is very specific about where he sees opportunity: Indian state-owned oil and gas and refinery companies. The government has slashed subsidies, meaning companies are able to keep more of the revenue they generate. Companies like ONGC may also benefit once oil prices do rise.
Thirdly Huntjens is investing in perpetual bonds because they are meant to be less sensitive to a rise in interest rates. As callable instruments, they can reset coupons. The risk is that these are usually treated as subordinated instruments, but they can yield as much as two times the same company’s senior debt.
The usual dynamic in which US Treasury yields move opposite to Asian bond spreads means total returns continue to be sustainable, he said. Although total returns in hard-currency Asian bonds are lower than in previous years, they should remain a safe haven within the global fixed-income universe once US rates begin to increase, Huntjens said.