Is It Worth Investing In Asia’s Post Evergrande Junk Bonds? We ask 5 strategists

Asian high yield bonds have been very popular with institutional investors in recent years.

Also known as junk bonds, they are non-investment grade debt securities that carry greater risk of default – and therefore higher interest rates to offset them.

A prominent recent example was the debt crisis in Evergrande, China. With more than $ 300 billion in debt, the world’s most heavily indebted property developer is on the verge of collapse. Fears of wider contagion in the industry and perhaps even the economy sparked 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 Asian high yield bonds?

To be clear, China’s real estate bonds make up the bulk of Asia’s junk bonds. As the Evergrande debt crisis resolved, other Chinese property developers also showed signs of tension – some missed interest payments while others failed to pay their debts altogether.

Here are the answers from 5 strategists interviewed by CNBC:

1. Martin Hennecke, Jakobsplatz
Head of Asia Investment Advisory and Communications

Investors should “avoid the use of leverage from bonds or pension funds at this point in time,” recommends Hennecke urgently, referring to the practice of borrowing for investments.

He said the predictability of high yield bond returns “is not nearly as clear … and such a strategy can turn out to be much higher risk than expected”.

“The recent sharp sell-off in Asian high yield bonds, coupled with the likely default or restructuring of some, is a good example of this,” he told CNBC.

Hennecke also said that investors should diversify globally to manage sector and country risks.

… Developments in the Chinese real estate sector are likely to weigh on investor sentiment in the short term, but we believe there are opportunities for the discerning investor.
Wai Mei Leong
PineBridge investment

“Finally, investors should be well advised to diversify across asset classes, since fixed interest rates as an asset class are generally exposed not only to the risk of default, but also to interest rate and inflation risks,” he said. The rising price pressure is “likely to increase and, in my opinion, may still be underestimated today,” he added.

That doesn’t mean investors should shake off high-yield bonds entirely, however.

“However, Asian junk bonds are already heavily sold out, resulting in much higher returns, and as long as you are aware of the risk involved, I would suggest that the asset class should not be excluded from well-diversified portfolios.”

2. Wai Mei Leong, Eastspring Investments
Portfolio manager for fixed income securities

“With China accounting for 50% of the Asian high yield bond market, developments around the Chinese real estate sector are likely to weigh on investor sentiment in the short term, but we believe there are opportunities for the discerning investor,” said Leong.

While China’s real estate sector has experienced periods of policy volatility in the past, she said, “we recognize that the depth and scale of policy action this time around has been unprecedented.”

Still, the real estate sector remains a major engine of the Chinese economy, accounting for 27.3% of the country’s fixed asset investment in 2020 while being a major source of income for many local governments, Leong said.

“The Chinese government would therefore rather have a healthy real estate sector than experience multiple large defaults that could potentially create widespread systemic risk.”

Leong added that China’s growing middle class, along with urbanization and the development of its megacities, is likely to continue to prop up real estate revenues in the long run.

“In the near future, investors are likely to reassess their risk expectations from China’s high-yield home bond sector,” added Leong.

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

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

Expect more failures from the real estate sector in the near future, Lau said.

Nevertheless, he does not expect that failures at certain companies will lead to a systematic crisis.

He also said Beijing is likely to give some easing of policy – like faster approval of mortgage applications and reopening the onshore bond market to stronger, higher quality real estate developers.

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

These kind of volatile wild market phenomena are not often observed and open up opportunities to get positioned in quality stocks. But caution is still needed as volatility is likely to remain …
Carol Lye
Brandy Wine Global

He also indicated that selective developers can continue to raise funds through the stock market, such as rights offers and share placements and asset sales.

The stronger developers will emerge “even stronger” from this crisis, while the weaker companies may go bankrupt, Lau said.

“As a result, we can no longer emphasize the importance of careful loan selection to identify winners and avoid losers,” he said, adding that his company “expects very decent returns over the next six to 12 months, if the Investors are able to survive and are able to endure the volatility. “

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

“In general, we would stick with the more conservative credit in China,” Chow said, citing firms that have less debt or strong ties with the government.

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

“We wouldn’t avoid high yield altogether, but the selection of individual loans is very important,” she concluded.

5. Carol Lye, Brandywine Global (investment manager under Franklin Templeton)
Associate Portfolio Manager

Chinese real estate firms that issue high-yield bonds have been selling since August, especially the lower-quality bonds – but they later rebounded thanks to verbal intervention by Chinese authorities, Lye said.

However, Chinese real estate bonds saw another sell-off last week, which the portfolio manager said was “by far the worst”.

“This was driven by concerns about hidden debt and contagion at higher qualities [BB-rated] Names that led to a fire sale of all names. Quality names were traded for under 80 cents. “

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

News of possible changes to the waiver of three red lines for mergers and acquisitions “had helped the market rally, especially quality stocks,” she said, referring to China’s “three red lines” policy introduced last year. This policy limits the level of indebtedness related to a company’s cash flows, assets, and capital levels.

Other encouraging signs for investors were a possible change in the resumption of issuance in the onshore interbank market and an increase in mortgage loans in October.

“These types of volatile wild market phenomena are not seen often and open up opportunities to be positioned in quality stocks,” she said. “But caution is still needed as volatility is likely to continue as various real estate companies are still in a tight liquidity position.”