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Omar Slim and Andy Suen, co-heads of Asia fixed income at US asset manager PineBridge Investments, share their insights on the outlook for Asian high yield bonds and outline investment opportunities.
Asia high yield’s performance in the first half of 2024 is likely
to continue due to falling default rates, enhanced market
diversification, and high yield carry, according to Omar Slim and
Andy Suen, co-heads of Asia fixed income at PineBridge
Investments.
“After several challenging years owing to China’s property
crisis, Asia high yield (HY) bonds delivered their strongest
showing in the first half of 2024 than in any comparable period
since the global financial crisis,” they said in a note.
With a total return of 10.5 per cent, Asia HY also outperformed
other major credit markets, including US high yield (+2.6 per
cent) and global high yield (+3.2 per cent), which have been more
sensitive to rate volatility.
They highlighted that although defaults in Asia have dominated
headlines in recent years, Asia HY ex China property has
maintained a lower default rate than US HY. Slim and Suen expect
this trend to continue over the next two years, supported by the
region”s macroeconomic backdrop, issuers’ access to cheaper local
funding channels, and a fairly distributed maturity schedule.
“The Asia HY market is now much more diversified and Asia HY
continues to offer higher yields relative both to historical
averages and developed market HY bonds,” they continued. These
levels are at the higher end of their 10-year historical range,
close to the 90 percentile. “Asia HY is one of the few market
segments that still offers potential for spread
compression.”
China
Slim and Suen emphasised how the recent supportive measures for
the housing market are positive steps towards reducing the risk
of a further deflationary spiral, but they believe that more
action is needed to stabilise the property market. They are
cautious on the outlook for the sector and believe that investors
should stay highly discerning, focusing on select names with
quality rental portfolios.
Outside of property, they see opportunities in select industrial
companies in China. These are benefiting from pro-growth policies
and the loose monetary policy stance, which is bolstering access
to cheap funding. The onshore and offshore funding cost
differential remains significant, creating dislocation
opportunities in the offshore bonds of select high quality HY
companies that have access to onshore channels.
Beyond mainland China
Away from the mainland, Slim and Suen think that the macro
environment of the broader Asian market remains robust, and they
see opportunities for investors to gain exposure to the world’s
fastest-growing region. They favour Macau’s gaming sector, where
fundamentals are still improving following the territory’s Covid
reopening. Macau’s gross gaming revenue has recovered to 75 per
cent of its pre-Covid levels. Consequently, they expect
gaming to surpass pre-Covid levels in 2025. They believe bonds
will enjoy support from the positive credit rating trajectory and
issuers’ proactive management of maturity profiles.
Slim and Suen also see opportunities in select Indian
corporates that are well-positioned to benefit from the country’s
economic expansion. One example is the renewable energy sector,
which continues to benefit from structural tailwinds catalysed by
the country’s goal of generating half of its electricity from
non-fossil fuels by 2030.
They also like select commodity-related issuers in Indonesia:
“These companies have strengthened their balance sheets and are
also benefiting from cheaper local funding channels, which
enhance their financial flexibility.”
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