3-min insight: Has the stars aligned for Asian Bonds to comeback?

Pheona Tsang, Chief Investment Officer of Fixed Income at BEA Union Investment
Miss Tsang is an experienced investment professional with unique perspectives on Asian bonds. She has been managing various Asian fixed income portfolios at BEA Union Investment, including credit and local currency bond funds since 2012. Strategies under her management have garnered numerous industry awards over the years.

As the US slows rate hikes, rate differentials between the US and Asian countries have been narrowing. The depreciation pressure of Asian currencies has dissipated as the dollar strength subsides. Together with China's reopening releases pent-up demand, regional high-yield bonds will fare well. Supported by a spate of positive factors, BEA Union Investment holds a constructive view towards China property and Macau gaming bonds, as well as Indonesia and India energy bonds.

We have invited Pheona Tsang, CIO of BEA Union Investment's Fixed Income team, to share her views and insights.

Q: The China bond market had been lacklustre last year. How did your investment team navigate the headwinds and manage risks?

A: Before the launch of the property-supporting three-arrow package, we had been very pessimistic towards the sector. In late 2021, way before the market, we already picked up signs of developers facing liquidity crunches. This resulted us into reducing the weighting of concerned areas to lowest levels possible, in order to minimise risks. Albeit piecemeal policies were rolled out subsequently to support the sector, but we were not convinced they were enough to turn the sector around. The watershed moment did not arrive until after the Party Congress, when the government put forth measures to facilitate financing for developers via loans, bonds and equity refinancing. Since then, we have been strategically increasing our weighting in China property bonds.

Q: China reopened in late 2022 alongside its three-arrow rescue package. What are your thoughts on the investment opportunities? Could you please share your investment strategies?

A: At the moment, we are paying close attention to three areas of opportunities. First, quality and large-scale developers of both investment-grade and high-yield that have not yet defaulted, including those that had been named and thrown support behind by the government. Second, bonds that have not yet defaulted or have sought to extend payment but are already trading at distressed levels. Third, bonds that have already defaulted but may undergo restructuring. Bonds trading at distressed levels, in particular, could present attractive entry points which may yield lofty returns should they manage to restructure successfully or end up not joining the default list. The outlook of Chinese property bonds should pick up on the back of rekindling demand from China's reopening, improving credit situation of developers and the implementation of new property-supporting measures such as lowering mortgage rates and extending payment duration across various cities including Beijing and Nanjing.

China's earlier-than-expected reopening not only lifts sentiment for China bonds, but also the Macau gaming sector. Casino operators may very likely see their operating cash flow turning positive, a boon for Macau high-yield gaming bonds. Macau's Gaming Inspection and Coordination Bureau announced the city's gaming revenue in January surged 82.5% year on year to US$1.4 billion. Also, the existing six casino operators had their licenses renewed for another 10 years, eliminating the risks concerned and in turn, lending support for the sector's rebound.

Q: Apart from China, what other potentials have you identified in Asian bonds? Should investors consider investing in Asian bonds this year?

A: Other regions in Asia are presenting different investment opportunities in the fixed income space. Geopolitical tensions have disrupted the supply and demand balance of commodities, pushing up coal prices and providing a boon to Indonesian commodity exporters. Many of the Indonesia oil and coal exporters reported very solid liquidity position last year and some managed to repurchase their USD bonds early by cash.

India's renewable energy high yield bonds are equally attractive. By 2030, the country hopes to reduce carbon emissions by 1 billion tonnes and power half of its energy consumption with renewable resources. To ensure supply stability and lessen its reliance on imports, India is ramping up its solar panel production capacity. To facilitate fund-raising for these projects, renewable firms are expected to enjoy ongoing favourable policies from the government.

We believe the bond market has digested, over an extended period, a spate of headwinds of volatility, inflation, high interest rates and recession risk. Just as the US rate hike cycle is coming to an end, together with improving regional growth on China's reopening, the stars are aligned for Asian high yield bonds.