Asia’s high yield (HY) bond market has grown rapidly over the past decade and has become an important component of the global emerging market high yield universe. Against a backdrop of rising rates and volatility, investors may find that Asia high yield offers an attractive value proposition, with protective factors such as low interest rate sensitivity as well as compelling yields.
Valuations. Asia high yield has relatively reasonable valuations compared to the long-term average, offering an attractive entry point with room for potential capital appreciation.
Source: J.P. Morgan, Bloomberg, PineBridge Investments as of 31 December 2021. Asia HY Credit Spread is represented by the JACI Non-Investment Grade Index. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
Competitive yield and low interest rate risk sensitivity. A comparison of Asia and US high yield highlights Asia’s shorter duration, but with nearly double the yield of US high yield. Shorter duration is a valuable feature in today’s rising rate environment, as it indicates less sensitivity to rate hikes. The shorter a bond’s duration, the less its value is likely to fall as interest rates rise.
Source: Bloomberg, PineBridge Investments as of 15 February 2022. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Duration is a measure of the bond’s sensitivity to changes in interest rates. Yield refers to the rate of return if bonds are held to maturity. The rate of return includes the coupon payments received during the term of a bond and its principal repayment upon maturity.
Diversification benefits. Alongside shorter duration, Asia high yield’s correlation with US Treasuries has historically been very low, adding to the buffer against interest rate hikes.1 In addition, the Asia high yield market offers active credit selectors a rich universe to position across sectors, markets, and credit ratings.
Source: J.P. Morgan, PineBridge as of 31 December 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
The China property sector historically has had a large weight in the Asia High Yield Index,2 but its weighting has declined as the weakest names exited the index due to defaults, and the overall market value of the sector has dropped. The sector’s weighting in the index fell from 35% in mid-2021 to 14.5% in mid-March 2022.3 While we expect the sector to remain a source of volatility in the near term, we believe companies of better quality will prevail and that the contraction of the sector will further enhance sector diversification for Asian high yield. We expect other major sectors, such as renewables and commodities, to continue to register healthy growth.
Stable fundamentals. The underlying fundamentals of Asia credits, in general, continue to improve or remain steady. Current credit spreads suggest the market has assumed too much default risk, and we believe the market is too bearish relative to credit fundamentals, which presents an opportunity to hunt for value.
Source: Bloomberg, JP Morgan estimates as of 31 January 2022.
Constructive long-term macro trends. The market’s prospects are underpinned by the region’s healthy long-term macroeconomic fundamentals. The International Monetary Fund expects emerging and developing Asian economies to grow 5.9% in 2022, faster than the global average and exceeding forecasts for advanced economies. India’s expansion, at a projected 9% for 2022, is expected to lead the region’s growth.4 Over the long term, structural trends such as digitalization, green energy, and urbanization are viewed as key drivers of the region’s sustained growth.
Considering recent credit events in Asia high yield, particularly in the property sector, we favor a selective approach that draws on thorough credit research to find the optimal balance between risk and returns. We believe an approach that focuses on issuer fundamentals, sectoral and macroeconomic cycles, and environmental, social, and governance (ESG) considerations has the potential to enhance income generation and capital appreciation.
With Chinese issuers representing a major component of the Asia high yield market, we believe a deep understanding of Chinese policy and its implications for issuers is critical. For example, the government has recently been signaling its intention to stabilize the property sector, which has faced particular challenges since early 2021. While we think the policy direction remains supportive, we remain cautious on weaker names in the sector given the lack of more tangible, effective policy actions thus far. On the other hand, we think select higher-quality names have been oversold and present medium- to long-term opportunities. We believe active management can help investors navigate this highly dynamic environment and offers the potential to maximize income and growth opportunities.
1 Bloomberg, PineBridge as of 31 January 2022.
2 Refers to the JPMorgan Asia Credit Non-Investment Grade Index.
3 As of 22 March 2022.
4 International Monetary Fund as of January 2022.
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