It is with some trepidation that investors are looking forward to next year, according to FinanceAsia’s inaugural Asia Credit Market Outlook for 2020 in partnership with Fitch Ratings.
Indeed, what stands out from the survey results is its relatively downbeat tone and its focus on international politics, although it is worth mentioning that the survey was conducted before a Phase One trade deal was announced between the US and China in early December. As a result, two-thirds of respondents cited the escalating trade war and recession as the biggest risks for Asia Pacific issuers.
“I attended the IMF/ World Bank meetings with my colleagues in Washington this past October,” said Stephen Schwartz, senior director and head of Asia Pacific Sovereigns at Fitch Ratings. “As the meetings wound down, we’d ask ‘What are your takeaways from the meetings this year?’
“A lot of it was just how pessimistic everybody was. Part of it had to do with global monetary easing and there was a sense that central banks are being asked to do more than they can to support growth,” he added.
The scale of these risks means that almost the same number of respondents (66.4%) are cautious about their outlook for next year. But, warns Schwartz, that pessimism is relative to what people are used to in Asia.
“I’d stress that there was a lot of pessimism at those meetings and it has carried over into the survey… but Asia has been surprisingly resilient. It’s still the world’s fastest-growing region and domestic demand has been an engine of growth in many economies here, fuelled by infrastructure spending and room for policy easing,” he emphasised.
Geopolitics aside, the major concerns for the survey’s respondents centre around refinancing risks. Indeed almost half of those questioned (49%) cited refinancing challenges and a material rise in defaults as a worry.
“The bulk of corporate credits are from China and for Chinese corporates, refinancing risk is nothing new,” said Ying Wang, managing director and head of APAC energy & utilities and China research initiatives at Fitch Ratings. “It has been at the top of investors’ minds for 18 months.”
“The refinancing need in terms of debt maturities is still very high,” she added, saying that it is likely to be at the same level [in 2020] as this year. This will inevitably lead to defaults along the way and 59% of respondents believe that there will be a slight increase next year.
While old favourites like telecom, media and technology (46.1%) and energy and utilities (37.5%) are expected to do well, upcoming sectors that investors intend to look at are property (37.5%) and infrastructure (32%).
“Property has a higher degree of transparency and corporate governance,” said Wang. She describes it as a pillar industry in China, adding that infrastructure is “a top priority for the Chinese government” with a lot of implicit state support.
In might seem confusing that although infrastructure and property are expected to do well, at the same time almost half of respondents (49.2%) cited China Local Government Financing Vehicles (LGFV) – which are often used to finance property and infrastructure – as the sector they are most concerned about.
“Onshore, the sector is large and has a history of almost a decade,” he said, adding that despite the strong growth offshore, it still accounts for less than 5% of LGFV debt stock.
This lack of familiarity is backed up by the survey, with 48% of respondents saying that a lack of transparency is their major investment hurdle.
“We did a round table in Hong Kong recently,” Gao said. “And I raised exactly the same questions to attendees. The answer depends on where the investor is based. For foreign investors, they struggle with Chinese local government issues – the bankers are not available and there is no translation of the paperwork. But Chinese investors have access to the data and the transparency.”
There were few surprises in the responses about the tenors that investors prefer, with 41% opting for three to five years and 25% favouring two to three years. “Investors prefer three-year paper because they don’t have a greater visibility on the [US] Treasury yield,” said Gao.
One of the major investment themes of the year has been environmental, social and corporate governance (ESG) financing. It is not yet dominant, but almost half (48%) of survey respondents said that ESG has been included in their investment analysis framework. More to the point, although just 16% said that ESG was a significant factor in their investment decisions, an additional 32% said that it was one of the key factors to consider.
Offshore investment in the Chinese onshore bond market continues to rise albeit from a low base. “Foreign participation in China’s bond market is very low even if the incremental growth is high,” confirmed Wang. The dominant route for investors remains the mutual market access scheme Bond Connect (36.5%).
Despite the introduction of Chinese bonds into international indices, the landscape is not expected to change rapidly and Bond Connect will continue to dominate. “It’s likely to remain the same for the next three to five years,” concluded Wang.
For a month until 3 December, FinanceAsia surveyed market participants about the key trends they expected to see in 2020. Answers came from 117 executives from across the region. Of those, 22 were C-Suite executives, 55 were in senior investment management, and 40 were "other".