Opportunities to buy and hold are growing more attractive in Asian fixed income, as yields have risen. Hong Kong and China property names, along with investment grade Chinese industrials and Indian bank bonds are at the top of HSBC Global Asset Management’s wish-list.
Earlier in the year the market was too expensive, which meant 2013 was set to be a year of yield carry for bonds, with not much space for capital gain. However, over the summer Asian fixed income experienced a healthy rationalisation, according to Cecilia Chan, fixed income chief investment officer for Asia Pacific at the firm.
“From now to the near future I think the [10-year US Treasury] market will be range traded from 2.4% to around 2.8% or 2.9%, so USD bonds are still a yield carry asset class. You may have some capital loss but it will be compensated by the yield carry,” she said in an interview with Asiamoney PLUS.
The average yield on the JACI index is around 5%. Investors tend to be happy to look at the asset class to buy and hold if the yield is anywhere above 4%, she said. Within the credit space, in terms of sector preference her outlook has not changed much since the start of the year.
“For long-term strategic investment, it was the Chinese and HK properties and we are still overweight in that. What will change is on a bottom-up basis, when we see good opportunities we will lock in new issuance and switch from some existing bonds or on the back of a stronger market,” she said.
“We are also overweight Chinese industrials in the investment grade space. It’s hard to generalise and I think it will be name specific even within the SOE sector, but we are more positive on the sector than before in investment grade. In high yield industrials we maintain underweight.”
In addition, she believes there are opportunities to be found in Indian banks.
“We have a more dynamic flexible approach on the Indian bank area. Earlier in the year we were underweight, then neutral, overweight, back to neutral and now we are slightly underweight, but I think we will look to moving back to neutral. You know how volatile the currency and the rates over there are, so we take advantage of the volatility and shift our exposure on that sector,” she said.
She is less enthusiastic about Indian corporates unless they have a direct government link. Other areas that she is currently underweight include sovereigns, particularly in the USD space, which she believes are overvalued.
“The Philippines and Indonesia were really expensive so we decided to be quite underweight and we have been adding back to the five-year and ten-year part of the curve after the sell-off. Now we are slightly underweight but less so than before,” she said.
On the question of frontier sovereigns she said she would be open minded if the yield was attractive, but would not make a big investment and would consider such credits only as a diversification play.
“For those deals in the past there were situations where they came out, were liquid for a while, but then people forgot about them and they became illiquid and expensive. You need to take care of it, it’s nothing like a buy and hold, it’s more like buy, monitor the situation, and then get out,” she said.
Local currency
On the local currency side the biggest disappointments this year came from India and Indonesia, said Chan. In terms of long-term opportunities, the RMB has performed along with expectations and is still appreciating gradually without too much volatility, so in terms of strategic and lower risk investment the Chinese currency still holds its position as favourite.
Most currencies in Asia have moved sideways, or fallen and rebounded. The real question mark, she said, is over whether there is now an opportunity to buy in India and Indonesia.
“The rupiah dropped 15% year-to-date and the rupee was down 12% and has been stabilising. For long-term investors I have to say this is a good opportunity. Fixed income investors are not naturally risk seeking but if you want some risk these two currencies become interesting as recently you have seen some improvement in the current account balances,” she said.
“But short term there could be a further sell off and there is always that possibility so people need to be prepared for them as more volatile currencies. But I would consider adding them for a long-term investment.” She is currently considering adding INR back into the portfolio.
Onshore investments
In the future, Chan will be looking at China’s onshore bond market to try to find yield pick-up opportunities over the dim sum space. HSBC was given an RQFII quota earlier this year.
“We haven’t started investing yet but we will when we are allowed to do so and we think that market will be interesting and offer more opportunity and potential for investors. The dim sum market has more foreign names and the deals are smaller. Onshore there are more local names but we expect a yield pick-up of 50bp to 100bp onshore versus offshore,” she said.
“When we invest [onshore] we will focus on the better quality names with a local rating of ‘AAA’ and some high ‘AA’ names. Those are expected to be equivalent to our investment grade international ratings. Onshore I think the major opportunities are in financials but again it will be selective. In terms of new developments in the Asian markets it will be the RMB markets, both onshore and offshore, that deserve attention.