29 September 2021

Asia High Yield: Four Reasons to Consider This Compelling Market

Author:

  • The Asia high yield bond market has grown rapidly over the past decade and now accounts for approximately a quarter of the Asia US dollar bond market.
  • Attractive returns and valuations, low interest rate sensitivity, and underlying macro trends make the asset class a compelling portfolio addition.
Asia High Yield: Four Reasons to Consider This Compelling Market

Asia high yield has become an important component of the global emerging markets (EM) high yield universe in recent years. Yet investors’ access to a standalone allocation to Asia US dollar high yield remains limited. Exposures typically form a small portion of global or EM high yield fixed income portfolios.

Despite recent default concerns in the Chinese property sector, Asia high yield bonds remain a compelling investment, offering higher yields and lower interest rate sensitivity than global peers. However, investors should exercise selectivity via a thorough credit research to find the ‘sweet spots’ in the market and build a resilient portfolio that can ride out short-term volatility.

Why Asia high yield? Four key factors support this globally competitive asset class.

  1. Valuations remain cheap compared to the long-term average, offering an attractive entry point and room for potential capital appreciation.

    Asia HY Spread Still Wider Than Long-term Average

    Asia HY Spread Still Wider Than Long-term Average

    Source: J.P. Morgan, Bloomberg, PineBridge Investments as of 28 Sept 2021. Asia HY Credit Spread is represented by the JACI Non-Investment Grade Index. For illustrative purposes only. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. We are not soliciting or recommending any action based on this material.

  2. Asia high yield bonds offer better yield and shorter duration than global peers, which make them less sensitive to potential interest rate hikes.

    Asia HY Offers Better Yield with Shorter Duration

    Asia HY Offers Better Yield with Shorter Duration

    Source: Bloomberg, PineBridge Investments as of 30 June 2021. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. 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.

  3. The underlying credit profiles of Asia credits in general continue to improve or remain steady. Given current credit spreads,* we believe the market has assumed too much default risk and we see this is as an opportunity for value hunting as the market is too bearish relative to credit fundamentals.

    Selective Opportunities in Asia HY

    Selective Opportunities in Asia HY

    Source: BofA Merrill Lynch, PineBridge as of 31 August 2021. For illustrative purposes only. Any opinions, projections, forecasts, or forward-looking statements presented are valid only as of the date indicated and are subject to change. We are not soliciting or recommending any action based on this material. Past performance, or any prediction, projection or forecast, is not indicative of future performance. *Credit spread is the difference in yield between a U.S. Treasury bond and another debt security of the same maturity but different credit quality.

  4. The market is underpinned by the region’s healthy long-term macroeconomic fundamentals. The International Monetary Fund expects emerging and developing Asian economies to grow 6.4% in 2022, faster than the global average as well as advanced economies.1 China’s growth this year is expected to remain at low to mid 8%. Over the long term, structural trends such as digitalization, green energy, and urbanization are seen as key drivers of the region’s sustained growth.

How to manage risk and capture value

As investors pursue better yield and capital protection in difficult markets, we believe the Asia high yield market offers plenty of value, especially for those able to navigate across credit ratings, sectors, and markets. Balancing yield and risk will be key.

Active credit selection based on comprehensive credit research and manager experience allows for more nimble risk positioning along the yield curve as conditions evolve. We believe an approach that goes beyond market capitalization or credit rating screening, with a focus on issuer fundamentals sector and macroeconomic cycles, and environmental, social and governance (ESG) considerations, may enhance income generation and capital appreciation.

With Chinese property issuers a major component of the Asia high yield market, stringent credit selection is important to avoid potential default exposures as recent borrowing restrictions may strain overleveraged players. However, we believe the regulatory tightening will be positive for the sector in the longer term.

In addition, Asia’s emerging market for sustainability-linked bonds is also poised to provide potential new opportunities that have not been widely available to date in Asia high yield. This segment has seen a mini-boom over the past year, as corporates tapped ESG-dedicated institutional capital to finance green projects as governments also race to reduce carbon emissions.

An actively managed standalone allocation to Asia high yield can help maximize the rising income and growth opportunities in this highly dynamic market.

Footnote

1 IMF as of July 2021.


Disclosure

Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.

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