Strategists investing in Asia Junk Bonds after the Evergrand Crisis

A multi-storey apartment building at the Riverside Palace Development under construction by China Evergrand Group in Taiqang, Jiangsu Province, China on Friday, September 24, 2021.

Kilai Shen | Bloomberg | Getty Images

Asian high-yield bonds have been a hot favorite among institutional investors for the past few years.

Also known as junk bonds, these are non-investment grade debt securities that carry large default risks – and therefore, high interest rates to offset them.

A recent high-profile example was the debt crisis in Evergrand, China. Weighing in at more than 300 300 billion in liabilities, the world’s most indebted property developer is on the verge of collapse. Fears of a broader transition to industry and possibly the economy triggered a worldwide sales shutdown in September.

Amid uncertainty over China’s junk bond market, CNBC has asked five strategists and portfolio managers: Would you advise investors to buy Asia’s high-yield bonds?

To put it bluntly, Chinese real estate bonds make up the lion’s share of Asia’s junk bonds. As Evergrande’s debt crisis unfolded, other Chinese real estate developers began to show signs of strain – some missed interest payments, others defaulted on their loans.

Here are 5 responses from CNBC interviews:

1. Martin Heneke, St. James’s Place
Asia Investment Adviser and Head of Communications

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

He said the forecast for returns on high-yield bonds was “almost unclear … and that such a strategy could be much more risky than expected.”

“The recent sharp sell-off in Asian high yields, combined with a possible default or restructuring of something, is a good example of this,” he told CNBC.

Heinke added that investors need to diversify globally for risk management in the sector and the country.

… Developments in the vicinity of the Chinese property sector will affect investor sentiment in the near future, but we believe there are opportunities for prudent investors.

Y Mei Leong

Pinebridge Investment

“Last but not least, investors should be well advised to diversify the asset class, noting that fixed interest as an asset class is usually not only the default risk, but also the interest rate and the risk of inflation,” he said. Rising price pressures are “arguably increasing and in my view are probably still undervalued,” he added.

But that doesn’t mean investors should stop high-yield bonds altogether.

That being said, Asian junk bonds have already sold sharply, sent yields much higher, and as long as one is aware of the risks involved, I would suggest that the asset class should not be excluded from well-diversified portfolios. “

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

“As China is responsible for 50% of Asia’s high-yielding bond market, developments in the vicinity of the Chinese property sector will affect investor sentiment in the near future, but we believe there are opportunities for prudent investors,” Leong said.

Although China’s property sector has historically been the subject of a period of policy-driven instability, he said, “We acknowledge that the depth and scale of the policy system is unprecedented.”

Still, the real estate sector remains a key driver of China’s economy, accounting for 27.3% of the country’s fixed assets investment in 2020, a key source of revenue for many local governments, Leung said.

“Therefore the Chinese government would prefer a healthier property sector than looking at multiple large-scale defaults, which could potentially cause widespread systemic risk.”

Leong added that in the long run, with China’s growing middle class, urbanization and the development of its megacities, revenue support for the property sector is likely to continue.

“Investors may re-evaluate their risk expectations towards the Chinese high-yield asset bond sector in the near term,” Leong added.

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But China’s move to reduce debt in the real estate sector will eventually create “strong market discipline” among real estate firms and improve the quality of their bonds, he added.

3. Arthur Lau, Pinebridge Investments
Emerging market co-head fixed income and Asia main ex-Japan fixed income

Expect more defaulters from the property sector in the near future, Lau said.

Nevertheless, he said he did not expect a systemic crisis as a result of defaults by certain companies.

He added that Beijing would probably simplify the policy – such as speedy approval of mortgage applications and reopening of the offshore bond market for strong and advanced property developers.

Some liquidity will help reduce anxiety, Lau added.

Such volatile wild market phenomena are not often seen and open up opportunities to stand in the name of quality. However, the warning that there may be instability is still certain …

Carol Lai

Brandywine Global

He added that selective property developers are still able to continue raising funds through equity markets, such as right offers and share placements, as well as asset sales.

Strong developers will become “stronger” from this crisis when weaker companies could eventually default, Lau said.

“Therefore, we cannot overemphasize the importance of careful credit selection in selecting winners and avoiding losses,” he said, adding that his firm expects “very decent returns in the next 6 to 12 months if investors are able to identify.” Survival and instability are able to stomach. “

4. Sandra Chow, CreditSites
Co-head of Asia-Pacific research

“In general, we will hold more conservative credit in China,” Chow said, quoting companies that have low or strong government links to debt.

“High-yield credits in Indonesia and India have become more resilient and better supported by investors for diversification outside of China or Chinese real estate,” he said.

“We cannot completely avoid high yields but personal credit selection is very important,” he concluded.

5. Carol Lai, Brandywine Global (Investment Manager under Franklin Templeton)
Associate Portfolio Manager

Chinese real estate companies that issue high-yield bonds have been selling off since August, especially low-yield bonds – but they rallied later, thanks to verbal intervention from Chinese authorities, Lai said.

However, another sell-off in Chinese real estate bonds last week that the portfolio manager said was “the worst ever.”

“It simply came to our notice then [BB-rated] The names that led to the sale of fire throughout all the names The quality name was trading below 80 cents. “

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

News of the possible change in the waiver of the three red lines for consolidation and acquisition “helped the market assemble a whip in the name of quality in particular,” he said, referring to China’s “three red lines” policy that was introduced last year. That policy sets a limit on a firm’s debt, relative to its cash flow, assets, and capital level.

Other encouraging signs for investors include the potential reopening of the issue in the onshore interbank market and the jump in October mortgage lending.

“Such volatile wild market phenomena are not often seen and open up opportunities to stand in the name of quality,” he said. “But warnings are still being issued that there could be instability as various asset companies are still in a tight liquidity position.”

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