Asian high yield debt enticing global instos
Asian sovereign dollar and particularly high yield bonds look set to enjoy rising fund inflows, as yield-starved investors across the world continue to chase the relatively appealing yields on offer, according to investment consultants and rating agencies.
A combination of resilience to the Covid-19 pandemic and better macroeconomic indicators mean higher risk debt from the region is generally becoming more appealing to Asian asset owners and those from elsewhere.
Andries Hoekema, London-based global head of insurance segment at HSBC Global Asset Management, told AsianInvestor between April and early November the fund manager’s Asian bond funds received over $1.4 billion in inflows, roughly $900 million of which was invested into Asian high yield funds (although these flows included a large allocation from retail flows).
A sizeable minority of these funds were received from insurers, mostly life and mixed insurers. “Flows were funded in many cases by sales of unit linked bonds and equities,” said Hoekema.
“The relatively strong performance of Asian economies during the Covid crisis has also unlocked interest from insurance investors in customised mandates in Asia high yield,” he added, declining to give specific data on flows.
Asia’s high yield debt market is comprised of around $300 billion of outstanding US dollar denominated bonds, according to BlackRock
The appetite for the bonds is emerging from insurers within Asia and without. Hoekema said that many European insurers find that the returns from Asian high yield now justify the high capital charges for the first time since new Solvency 2 capital charges came into force in 2016.
“Asia high yield stands out in the return-for-regulatory capital comparison. This is noteworthy given that since the implementation of Solvency 2 in 2016, the additional returns to be earned from high yield compared with investment grade have generally not been sufficient to compensate for the additional regulatory capital held against high yield versus investment grade.”
Speaking to AsianInvestor after a webinar last week, Boris Moutier, chief investment officer for Hong Kong and Asia at Axa, confirmed he is eyeing Asia high yield strategies for potential investment opportunities.
Other asset owners are also taking note. Paul Colwell, Hong Kong-based head of the advisory portfolio group for Asia at Willis Towers Watson, says private banks and endowments also appear likely to invest more funds into Asian bonds.
ROBUST REGION
“Private banks [are] more nimble and responsive to market opportunities and they have historically played in the Asian high yield space and in some cases take on leverage to maximise their positions. In addition, I would expect to see some endowments make allocations,” he told AsianInvestor.
The rising investor demand is due to the Asia region’s combination of relatively robust economies and appealing bond yields.
By way of comparison, China reported on October 19 that its economy grew 4.9% in the third quarter of 2020, up from a 3.2% increase in the second quarter. Meanwhile the US economy shrank 31.4% in the second quarter.
The divergence in economic strength is evident in Asia’s dollar sovereign bonds. They enjoyed the strongest credit fundamentals of any emerging market area for the eighth successive month in November, possessing the most bonds on positive outlooks minus those with negative outlooks (see table below), according to research by Fitch Ratings for AsianInvestor.
Emerging market credit fundamentals, Jan 2019-Nov 2020
(Positive minus negative rating changes)
| Emerging Asia | Emerging Europe | Latin America | Middle East Africa | Total Net | |
| Jan-19 | 0 | 5 | -7 | -3 | -5 |
| Jul-19 | 1 | 3 | -8 | -5 | -9 |
| Jan-20 | 0 | 3 | -4 | -2 | -3 |
| Jul-20 | -5 | -5 | -11 | -10 | -31 |
| Nov-20 | -3 | -5 | -10 | -10 | -28 |
Source: Fitch Ratings
Ed Parker, head of Europe, Middle East and Africa sovereigns at Fitch Ratings in London, said the relative credit strength of the region contrasts with many other regions, where countries look set to experience a second wave of sovereign debt downgrades as their economies suffer from rising Covid-19 infections.
“Asian credits have fared less badly than emerging market sovereigns in Latin America and the Middle East & Africa as many had stronger credit fundamentals going into the Covid-19 crisis, are generally less exposed to oil prices and generally have closer trade links with China, whose economy is outperforming the rest of the world,” he said. “Many, but not all (such as India), have also seen less bad health outcomes and consequent economic disruption than other regions.”
“Asia is generally considered to be much further along in its Covid recovery cycle than other regions,” agreed Colwell. “Economic activity has picked up markedly in China and other parts of the region too. Further, government and corporate balance sheets are generally robust.”
Another compelling factor for Asian debt is that developed market government bonds and investment grade corporate bonds are very expensive and offering low yields. The yield on 10-year US Treasury on November 16 only yielded 0.901%.
In contrast, HSBC GAM rates Asian emerging market debt as its most favoured asset class, and projects 10-year returns to be 7%.
“When compared with other regions, Asian high yield offers more reasonable returns given market pricing and the uncertain macro outlook,” said Colwell.
PASSIVE APPEAL
While the appeal of Asian bonds may be rising, institutional investors are not particularly happy with the job their active managers are doing.
In a survey by bfinance published 30 July, 53% of global investors reported they were dissatisfied with their emerging market debt manager performance in 2020, compared with 37% for their emerging market equity manager performance.
Research from HSBC GAM suggests that active managers in the sector may not be worth the higher fees. It identified China and Hong Kong (combined), Korea, India, Taiwan and Singapore as five of the six emerging market economies best positioned to meet the challenges of Covid-19, in a study considering healthcare response, growth resilience, external dependence, and internal and external capacity for economic policy support (the other was Russia).
These five countries represent more than three quarters of both the overall Asia dollar credit universe – as tracked by the JP Morgan Asia Credit Index (JACI) – and the Asian high yield dollar credit universe – as tracked by the JACI Non-Investment Grade Index. The JP Morgan Asia Credit Index has gained 4.4% year to date.
In other words, cheaper index tracking funds would have provided much of the returns offered by active managers.
AsianInvestor and Credit Suisse Asset Management will be hosting a webinar on November 24 at 4pm Hong Kong time entitled 'Emerging Markets Corporate Debt – Navigating the Unknown'. For more details and to register free of charge, please click here.