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A Tale of Two Cities: Why Goldman Sachs Asset Management sees great potential in Asian high yield

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This is a sponsored article from Goldman Sachs Asset Management.

Goldman Sachs Asset Management has a unique take on the Asian high yield landscape in recent years — and a potentially profitable one at that.

Amid increasing uncertainty, Goldman Sachs Asset Management remains focused on Asian high-yield bond strategies which, its Asian credit team says, “offer a relatively attractive potential return”. The key, explained Salman Niaz, head of Asian credit, is finding the opportunities that harness divergent dynamics in China and other emerging Asian markets.

“It has been a tough year for risk assets globally,” Niaz told Asian Private Banker, “including global and Asian fixed income,” as evidenced by the 33% drop in Merrill Lynch indices year-to-date.1

“The way we think about it is that it’s a tale of two cities,” Niaz pointed out. “We think about China and non-China high yield as two different stories. And we believe that investors should pay close attention to these two market segments with different dynamics.”

Roughly 19% of the 33% decline comes from China’s property sector, Niaz said. Less appreciated, he added, is that the drawdown in Asian high yield, excluding China property, is in the ballpark of the 13.5% drop in US high yield.2 Another important consideration here, though, is a potential upside created as a result.

The region’s high yield assets are “much better quality” because Asia looks more likely to thrive as the post-pandemic reopening trade unfolds. Niaz said that Asia’s functioning banking systems, productivity “upside”, robust employment outlooks and strong gross domestic product trajectories — driven by rising domestic demand — compare favourably to other regions.

When investors connect the dots, Niaz said, Asian high yield strategy is “an attractive way to participate in that structural Asian growth story”. On a prorated basis, Niaz explained, “Asian high yield, excluding China property, offers roughly 14-plus percent for a three-year duration.3 In terms of fixed income, that’s an extremely high yield — compared to a high single-digit yield for a weaker average rating quality and longer duration US high yield bond market.”

As economic growth in China and the rest of the world is slowing, Niaz asserted that Asia’s economic outlook is still more robust than the rest of the world. Part of the reason is that the fundamental drivers for GDP growth in the region remain intact.”

Importantly, Niaz added, this likely outperformance, and the roughly 11% yields on a pro-rated basis, mean that “China property potentially compensates you for an extremely high-level default”.

Elevated yields cushion default risk

In devising its Asian high yield strategies, Goldman Sachs Asset Management tracks often diverging trends over 12 countries and hundreds of companies.

“It’s not a single country or a single sector, and it’s fairly well diversified,” Niaz said. “So, you would need quite a bit of economic shock, growth shock, to all the economies for default from this part of the strategy to become elevated. And at the moment, based on the maturity profile and the fundamental balance sheets of these companies, we think the default outlook seems quite manageable. That’s the reason to like this part of the market which, we think, is on the margin — oversold.”

At the other side of the spectrum, China property high yield assets also have the potential to outperform. “Volatility came back earlier this summer,” Niaz said, “when home buyer protests started on mortgage payments.” Subsequently, Beijing policymakers stepped in with various measures, including market-supportive loans from policy banks, to ensure the completion of properties. China’s central bond insurance agency stepped up efforts to guarantee onshore bond issuance programmes. “All of these are steps in the right direction,” Niaz argued.

None of this means global risks in the short run are going away. But Niaz pointed out that the “extremely elevated yields” at which the sector is trading “potentially compensate investors for a lot of the risk of default”. On the other hand, he noted that the various actions taken throughout the year are starting to have some impact, meaning that the “physical market in China is showing some very early signs of stabilisation”.

For more information, please visit Goldman Sachs Asset Management’s website.

1 As of 31 October 2022.
2 Source: Goldman Sachs Asset Management. As of 31 October 2022.
3 Source: Goldman Sachs Asset Management. As of 31 October 2022.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.

Risk Considerations
Emerging markets investments may be less liquid and are subject to greater risk than developed market investments as a result of, but not limited to, the following: inadequate regulations, volatile securities markets, adverse exchange rates, and social, political, military, regulatory, economic or environmental developments, or natural disasters.

When interest rates increase, fixed income securities will generally decline in value. Fluctuations in interest rates may also affect the yield and liquidity of fixed income securities.

Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price.  The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.

High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities.

Investing in high-yield securities can be complex and involves a variety of risks and benefits. Non-investment grade fixed income securities and unrated securities of comparable credit quality (commonly known as “junk bonds”) are considered speculative and are subject to the increased risk of an issuer’s inability to meet principal and interest payment obligations. These securities may be subject to greater price volatility due to such factors as specific issuer developments, interest rate sensitivity, negative perceptions of the junk bond markets generally and less liquidity.

This is a sponsored article from Goldman Sachs Asset Management.

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