The Asia Pacific hard currency bond markets began the year on a relatively firm footing, continuing the outperformance from last year.
However, the market gradually weakened through June on concerns about the potential trade war between the US and China, as well as increased supply in the primary market.
In July, the Asian high-yield market rebounded and staged a strong rally from its June low after the Chinese authorities encouraged financial institutions to provide funding to small-to-micro-sized companies.
Citywire AA-rated Gordon Ip said: ‘We are starting to see attractive value in Asian credits, especially China high yield.’
Currently, the absolute yield of Chinese high yield bonds is at a new three-year high.
Ip manages the Value Partners Greater China HY Income P Acc USD fund, which returned 24% over the past three years, against the average manager’s 9.1%.
The fund primarily invests in Greater China debt securities across the entire credit spectrum, including high yield, investment grade, convertibles and loans bonds.
What’s more, the 300 basis points (bps) yield differential between China high yield and US high yield is at its widest since September 2015.
‘In view of US-China trade tension, we have been favoring the property sector over the industrial sector,’ Ip said. He noted that the fund’s large allocation to the property sector that is purely domestic helps the fund to avoid some of the negatives from the potential US-China trade war.
Meanwhile, the fund’s preference for more seasoned bonds also helps to stabilise the fund’s performance.
Ip said his fund has rotated into positions with shorter spread durations and is actively looking for opportunities with low mark-to-market risks and stable income generation. Ip’s fund also switched positions from names that are subject to increased primary issuance to those with less supply risks.
Despite prevailing supply risk due to its healthy sales growth year to date, Citywire + rated Mark Tay said his portfolio continues to be positive on the Chinese property sector.
Tay manages the Allianz Dynamic Asian High Yield Bond fund, which returned 22.19% over the past three years. The Allianz Dynamic Asian High Yield Bond fund invests primarily in high-yield rated debt securities of Asian bond markets.
‘We also like Indonesian credits – especially commodity related names –, where we are constructive on credit fundamentals and relative valuations remain attractive,’ he said.
Tay said the dislocation in market liquidity in the first half of 2018 has prompted him to invest in bonds that could provide liquidity for the portfolio and reduced exposures to bonds with lower liquidity.
‘We focus on fundamentally stronger, shorter-dated USD high yield bonds for interest accrual and these bonds should hold up well in the current environment,’ he said.
Second place in the risk-adjusted ranking is the LO Funds - Asia Value Bond (USD) fund, managed by Citywire AA-rated Dhiraj Bajaj. The fund returned 15.96% over the past three years.
Bajaj said Asian high yield has cheapened up significantly versus the US, Latin America (Latam) and other emerging markets (EM) high yield over the past six months.
The fund has increased its Asian high-yield exposure, particularly in the single-B segment where it could capture yields of around 8% to 11% easily.
In addition, Bajaj’s fund has also rotated out of some Japanese hard currency exposure to China investment grade State-Owned-Enterprises (SOEs).
Some of the newer issuances this year are materially cheap for firms that are now among the largest in their respective sectors globally.
Meanwhile, the Oclaner Fds Asian Bond IA USD Cap fund, managed by Citywire A-rated Olivier Spoor, came third in this category.
The Oclaner Asian Bond fund invests in USD denominated bonds in the Asia ex-Japan region, including investment grade and high-yield bonds.
‘At the moment, we have hit an inflection point where Asian bonds look relatively cheap again,’ Spoor said. He said there is opportunity to buy bonds at more depressed levels and lock in attractive yields.
‘If we look at Asia’s high-yield corporate bond market, the correction is now the longest in time and the second deepest in terms of spread widening of its 12-year history,’ Spoor said.
In particular, Asia’s high-yield spreads started the year from an historic tight point of 420 basis points (bps) and reached around 700bps in mid-July.
This article was published in the September issue of the Citywire Private Wealth magazine.