Why Asian and HK dollar bonds offer an unusual level of appeal
Bonds across Asia are becoming increasingly appealing due to a combination of generally stronger economic conditions and a lower likelihood of defaults than other regions, plus a healthy level of issue flows, according to a senior set of speakers at a webinar co-hosted by AsianInvestor and HSBC Global Asset Management.
The webinar, ‘A new investment era: will Asian and Hong Kong bonds win the race for resilience?’ took place on June 5 and focused on how bonds across the region had fared amid the economic and financial strains created by the Covid-19 pandemic. The speakers were positive about the region’s prospects, particularly in relation to other parts of the world.
Cecilia Chan, chief investment officer for fixed income in Asia Pacific at HSBC Global Asset Management, began the webinar with a delve into the macroeconomic environment of 2020 and a look at how Asia’s bond markets had fared. She noted that Covid-19 had one undeniable impact: “it has brought the world’s economic outlook to a more synchronised phase”, with uncertainty over how rapid the recovery of the global economy would be.
As Chan noted, there is a difference in opinion over whether it will be L-shaped, V-shaped of U-shaped. HSBC Global Asset Management believes the recovery will be the latter, with recovery taking time and ending up at a lower rate than pre-Covid-19. The lower for longer economic phase long anticipated by the world has arrived far quicker than anybody had expected.
While this sounds concerning, Asia boasts some advantages. Its economies were hit by the virus faster but recovered quicker too, and as a result are better placed to grow during the rest of the year. That means default rates look set to be lower, while bond issuance is less likely to be emergency in nature.
Meanwhile, the fall in interest rates across the world means issuers can borrow at extremely appealing levels. Default rates in the region look set to rise from a level of 2% before the pandemic up to 4% now, but that is likely to be far lower than those experienced in Europe or the US.
For Jethro Goodchild, CIO of Hong Kong-based regional insurer FWD, the current environment offers some generally appealing conditions.
“If you look at the US versus Asia, on relative expected default rates, I am reassured that a lot of sovereign support for sectors in Asia will help to avoid default rates and sustain businesses in [troubled] areas like energy,” he said. “In the US vulnerable energy companies are not supported by the government as they are across Asia, along with more hotels and airlines issuing debt.”
Andrew Fung, chief financial officer of Henderson Land Development, felt that today’s conditions offered appeal for would-be borrowers too, particularly those in Hong Kong.
“The US dollar and Hong Kong dollar markets offer a special moment of opportunity for issuers like us, which didn’t used to use the markets too much in the past,” he noted.
Part of this appeal is the fact that Hong Kong dollar benchmark bond yields are currently above their equivalents in the US, a very rare occurrence that gives investors a change for a bit more yield in debt issued in the territory.
In addition, Fung noted that issuers needing to swap proceeds had also improved. “Over the last two years you have seen the Hong Kong dollar and renminbi swap market become more liquid than before, allowing people to conduct US and Hong Kong dollar swaps in a more competitive way.”
And Chan noted that another appealing point of Hong Kong’s bond market was - “quite good credit quality issuance generally”. That offers investors an unusual opportunity, particularly at a time of relatively appealing yields.
Goodchild added that he was particularly intrigued by the prospect of Asian high yield bonds, where he felt assiduous levels of analysis could turn up some appealingly valued bonds for fundamentally decent companies.
This sentiment was supported by listeners to the webinar. When invited to vote on which type of debt instrument they anticipated would offer the best risk-adjusted return during 2020, Asian high yield bonds were by far the most popular, gaining 41% of votes. Second was investment grade Asia bonds coming second with 31%.
Despite a generally vulnerable global economy, the support for Asian bonds is strong.
For more information on the HSBC ABF Hong Kong Dollar Bond Index Fund, please click here.