China is likely to see increasing defaults, but they aren
HONG KONG: UBS Asset Management has turned bullish on beaten down Asia junk dollar bonds and expects investors to buy more on borrowed money due to the appeal of higher yields.
The firm is positive on such securities from Chinese property companies in particular, its key overweight globally within high yield. The money manager expects China’s stimulus measures to help borrowers gain access to funding onshore, reducing offshore bond sales.
Despite a recent rally in Asia junk securities, yields are still near the highest since 2012, according to a Bloomberg Barclays Index.
“For the year, starting point at a 10 percent yield broadly, it’s a very good spot to deliver positive total returns,” said Hayden Briscoe, head of fixed-income for Asia-Pacific at the firm. “Even if you are wrong, there’s a big buffer there with double-digit yields.”
There has been a revival of buying on borrowed money in the region’s credit markets, with wealthy Singapore investors using such leverage toward the end of 2018.
More such flows are likely in the first quarter, according to Briscoe. Investors eager to deploy cash have poured into new issues from Chinese property firms this month, with demand for some running as high as 10-times the sale amount.
China is likely to see increasing defaults, but they aren’t likely to be “systemically important,” according to Briscoe.
The region’s junk bond market isn’t without risks. Some may come from global markets, and there is “a lot of pressure” in U.S. liquid loan markets and collateralized loan obligations, which could have knock-on impact on the region’s high-yield market, according to Briscoe.
Among the firm’s calls:
UBS Asset is sticking to the largest high-yield companies“Not as bullish” on emerging markets globally; sees risks of outflows and underweight sovereigns; buying protection in Malaysia, Philippines, Indonesia.
With the Fed pausing, the PBOC already easing, and more dovish policy outlooks for India and Indonesia, could see rate cuts in the region. - Bloomberg
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