Will the tough year for markets continue in 2019?
Investors should expect attractive valuations for Asian bonds this year following the 2018 sell-off
2018 was probably the worst year for markets in over a decade. A slowing global economy, strengthening of the US dollar and an ongoing trade spat between the US and China have contributed to volatile markets.
Local Asian bond markets such as Indonesia and India saw poor performance in both US dollar and local currency denominated bond issues. To illustrate, Indonesia’s US dollar bonds drop 14.2% in November after adding 16.4% in the same period in 2017.
Though this year may still be fraught with challenges, not everyone is panicking. Gregory Suen, investment director for Asian fixed income at HSBC Global Asset Management, takes a long view when it comes to Asian fixed income markets.
“If you take a long-term perspective, Asia remains one of the most stable asset classes compared to other asset classes out there,” explains Suen. “Asian spreads have not looked well but the valuations are starting to look more attractive as we go into 2019,” says Suen before the near-300 delegates of The Asset 13th Asian Bond Markets Summit in Singapore.
Within the Asian fixed income space, Suen is positive about companies that demonstrate solid corporate fundamentals with strong net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) or cash to total debt. “Asian corporates have improved over the past couple of years. We’ve had downgrades earlier in 2018, but I think that the upgrade-downgrade ratio has turned positive again, showing that rating agencies are getting more comfortable with the Asian corporate story,” says Suen.
When it comes to evaluating the prospects of Asian credit one needs to consider the recent bond defaults in mainland China that are happening more frequently. But Suen rejects the idea that default rates have reached alarming levels.
“The default rates in China are still low even though we have seen a pick up recently, especially in the onshore market,” says Suen. “The onshore default rate is less than 1%. Even if we say we expect a bearish case of a doubling of default in the next 12 months, the default rate would be relatively lower than many other markets.”
HSBC data show the percentage of defaults in the CNY bond market was 0.57% in 2018 compared to 0.01% in 2014.
The market is also watching the Chinese property market. In an environment where financing conditions are tightening, property companies in the mainland remain frequent issuers.
“Chinese property sector has underperformed mainly because there is a lot of supply coming from this sector. People worry about the refinancing risk,” says Suen.
“A lot of the supply is due to the quota system in China. Some of the issuers that got quotas earlier in the year needed to use up some of that or else they risk not being able to get the quota again next year.”
But property developers have the flexibility to raise funds in the offshore loan market. In the January to November period, 12 property developers were granted offshore loans amounting US$6.2 billion, HSBC data show.
Overall Suen is fairly confident about China’s bond market. As the largest bond market in Asia its sustained health is important for the development of the region amid concerns over internal debt.
“I think in China the leverage situation is going to be the headline news. But there are still areas where leverage isn’t that high such as China’s private sector. There could be some interesting opportunities in that area,” notes Suen.