Asia’s high-yield sector needs to diversify beyond China, according to bankers at Haymarket’s fifth Annual Borrowers & Investors Conference held in Hong Kong on Thursday.
Year-to-date, Chinese issuers account for 84.5% of total Asia ex-Japan G3 high-yield issuance while for investment-grade Chinese issuers account for 40.5%, followed by South Korea 28.2% and Hong Kong 23.9%, according to Dealogic data.
In terms of sector breakdown, Chinese property dominates the total Asia ex-Japan G3 high-yield sector, accounting for 81.1% of total share year-to date. For investment-grade, financials come on top with 40.8%, followed by property with 27.2% and utility and energy at 11.4%, adds the data provider.
This has led to some investors questioning the long-term credibility of the high-yield space given the lack of diversification.
“For high-yield, there is still some progress to be made in terms of diversification of country and sector,” said Eric Wong, portfolio manager at Fidelity Worldwide Investment at a panel titled ‘The Asian bond market’. “As a fund manager, I am a vehicle to help you make the best investments within an asset class [and] at the end of the day, you want diversification and growth.”
Panelists also believe that the composition of Asia’s capital markets will still be heavily geared towards investment-grade issuance, which will account for three quarters of total issuance for 2014. Chinese state-owned enterprises, large Indian corporates and sovereigns such as The Republic of Philippines are expected to tap the asset class for funding.
Investment-grade issuance has always dominated total Asia ex-Japan G3 issuance but the high-yield sector is gradually growing in terms of its market share, note panelists.
Investment-grade volume has doubled to $88.9 billion in 2013 from $40.9 billion in 2011, according to Dealogic data. High-grade has also grown twice in size to $29 billion in 2013 from $14.4 billion in 2011.
Challenging for high-yield
While the percentage of high-yield issuance has grown slightly in comparison to the total Asian fixed-income pie, declining access to easy money and an increasing rates environment as the Federal Reserve continues to taper could slow down the asset class’s growth, said panelists. Worst-case scenario would be a possible default from the high-yield space.
“High-yield issuance has just gone ballistic but I don’t believe one can anticipate this forever,” said Devan Selvanathan, head of global debt platform for Asia-Pacific at Natixis in the panel. “It is true that we have a tightening environment further to the tapering, but one can always assume there will be a default cycle that could come … [most likely occurring] in the high-yield market.”
When Ben Bernanke indicated in May 2013 the possibility that the Fed could start easing its purchasing programme as soon as September, investors began selling risk assets such as emerging markets in favour of cash and US securities.
Bond outflows from Asia can partially be explained by investors feeling they can get safer and rising yields in the US once the US central bank exits the market. As a result, the region saw 17 consecutive weeks of outflows after the announcement – a volume of $25.5 billion flowed out of bond funds, according to Barclays research.
“Global high-yield funds allocated to emerging markets and Asia high-yield are underweight Asia and retail has been pulling money out,” said Sarjeev Sidhu, global head of emerging markets debt, AEGON Asset Management at the panel.
Nonetheless, Asia has a dedicated set of Asian investors that have provided good support for the number of Reg-S deals that have hit the region’s capital markets in the past year or so, Sidhu highlights, adding that the number of Reg-S registered transactions have blossomed to about 50% of total deals in 2013 from 27% in 2012.
“The institutional money is fairly sticky and there is a demand to a certain degree for high-yield, primarily from dedicated Asian investors,” he said.
