Strategists about investing in junk bonds in Asia after the Evergrande crisis – News Couple
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Strategists about investing in junk bonds in Asia after the Evergrande crisis


The high-rise apartment buildings in the Riverside Mansion development under construction by China Evergrande Group in Taikang, Jiangsu Province, China, Friday, September 24, 2021.

Kelay Shane | Bloomberg | Getty Images

Asian high-yield bonds have been a favorite of institutional investors over the past few years.

Also known as junk bonds, these are non-investment grade debt securities that carry a greater default risk – and therefore, higher interest rates to compensate for it.

A recent notable example is the debt crisis in China’s Evergrande. The world’s most indebted real estate developer, with less than $300 billion in debt, is teetering on the brink of collapse. Fears of an infection spreading to the industry, and possibly even the economy, led to a global sell-off in September.

Given the uncertainty in China’s junk bond market, CNBC asked five strategists and portfolio managers: Would you advise investors to buy high-yield Asian bonds?

To be clear, Chinese real estate bonds make up the bulk of Asia’s junk bonds. With the Evergrande debt crisis unraveling, other Chinese property developers have also begun to show signs of stress – some have missed interest payments, while others have defaulted entirely.

Here are the responses from 5 strategists interviewed by CNBC:

1. Martin Henick, St. James Place
Head of Investment and Communications Advisory Asia

Investors should “avoid the use of leverage for any bonds or bond funds at this time,” Hennecke strongly recommends, referring to the practice of borrowing money to invest.

He said that the ability to predict returns in high-yield bonds “is not entirely clear … and such a strategy can turn out to be much higher risk than expected.”

“The recent sharp sell-off in high Asian yields, along with potential defaults or restructurings for some, is a good example of that,” he told CNBC.

Henneke also said investors should diversify globally in order to manage sector and country risks.

…developments surrounding the Chinese real estate sector are likely to affect investor sentiment in the near term, but we believe there are opportunities for the discerning investor.

Wai Mi Young

Pine Bridge Investments

“Last but not least, investors should be advised to diversify across asset classes as well, noting that fixed interest as an asset class is generally exposed not only to default risk, but also interest rate and inflation risk,” he said. He added that the rise in price pressures “is on the rise, and it can be said that in my view it may still be an underestimate.”

But that doesn’t mean investors should ignore high-yield bonds entirely.

All that being said, junk Asian bonds have already sold off sharply, driving their yields much higher, and as long as one is aware of the risks to be taken, I would suggest that the asset class should not be excluded from well-diversified portfolios.

2. Wai Mei Leong, Eastspring Investments
Fixed Income Portfolio Manager

“With China occupying 50% of the high-yield bond market in Asia, developments surrounding the Chinese real estate sector are likely to affect investor sentiment in the near term, but we believe opportunities exist for the discerning investor,” Leung said.

And while China’s real estate sector has historically been subject to periods of policy-driven volatility, “we recognize that the depth and scale of policy measures are unprecedented this time around,” she said.

However, the real estate sector remains an important driver of the Chinese economy, accounting for 27.3% of the country’s fixed asset investment in 2020, while it was a major source of revenue for many local governments, Leung said.

“So the Chinese government would rather have a healthy real estate sector than see many large-scale defaults, which could lead to widespread systemic risk.”

In the long term, Leung added, it is likely that China’s growing middle class, combined with urbanization and development of megacities, will continue to support real estate sector returns.

“Investors are likely to re-evaluate their risk expectations towards China’s high-yield real estate bond sector in the near term,” Leung added.

Stock Picks and Investment Trends from CNBC Pro:

But she added that China’s drive to reduce debt within the real estate sector will eventually lead to “stronger market discipline” among real estate companies, and improve the quality of their bonds.

3. Arthur Lau, PineBridge Investments
Co-President of Fixed Income in Emerging Markets and Head of Fixed Income in Asia Excluding Japan

Lau said he expected more defaults from the real estate sector in the near future.

However, he said he did not expect defaults in certain companies to lead to a systemic crisis.

He also said there is likely to be policy easing from Beijing – such as faster approval of mortgage applications and reopening of the internal bond market to stronger and better quality property developers.

All of this should help alleviate some of the liquidity concerns, Lau added.

This kind of wild, volatile market phenomenon is not seen very often and opens up opportunities to be put into quality names. But caution is still warranted as volatility may continue…

Carol Lay

Brandywine International

He also noted that selective real estate developers can still continue to raise funds through the stock market, such as rights offerings and stock offerings, as well as asset sales.

Lau said stronger developers will emerge from this crisis “stronger” while weaker companies may eventually default.

“Thus, we cannot stress more the importance of careful credit selection to pick winners and avoid losers,” he said, adding that his company expects “a very decent return in the next six to twelve months if investors are able to identify survivors and are able to withstand the volatility.”

4. Sandra Chow, CreditSights
Co-chair of Asia Pacific Research

“Overall, we will stick to more conservative credits in China,” Zhao said, citing companies with less debt or strong government ties.

“High-yield credits in Indonesia and India were more resilient and better supported by investors seeking diversification outside of China or Chinese real estate,” she said.

“We will not avoid a high yield entirely but the choice of individual credit is very important,” she concluded.

5. Carol Lay, Brandywine Global (Franklin Templeton Investment Director)
Associate Portfolio Manager

Lai said Chinese real estate companies issuing high-yield bonds have been sold off since August, especially lower-quality bonds — but later surged, thanks to verbal interventions from the Chinese authorities.

However, Chinese real estate bonds saw another sell-off last week in what the portfolio manager described as “the worst ever”.

“This was prompted by concern about hidden debt and contagion between high quality [BB-rated] Names that led to the sale of fire by all names. Quality names traded for less than 80 cents.”

B or BB rated bonds are considered low credit rating bonds, and are commonly referred to as junk bonds. However, bonds rated BB are of slightly higher quality than bonds rated B.

It said news regarding possible changes to the waiver of the three red lines for mergers and acquisitions “helped the market to stage a particularly sharp rally in quality names,” referring to China’s “three red lines” policy introduced last year. This policy sets a debt limit in relation to the company’s cash flows, assets and capital levels.

Other encouraging signs for investors include the potential change in the reopening of issuance in the internal interbank market, and a jump in mortgage loans in October.

“This type of volatile wild market phenomenon is not often seen and opens up opportunities to position itself in high-quality names,” she said. “But caution remains warranted with the potential for continued volatility as many real estate companies remain in a tight liquidity position.”



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