This is a sponsored article from BEA Union Investment Management Limited.
Lower default rates for Asian corporates as compared to global peers, coupled with higher bond yields, continue to attract global investors in the search for sufficient return.
Asian countries are being helped by strong exports, thanks to the improving global demand and strengthening economy of China. The year 2017 has also seen an upturn in the commodity space, with Asian businesses receiving a boost from improving earnings and a recovery in prices.
While China continues with its financial deleveraging agenda, bank lending to the real economy remains stable. Interestingly, growth in China is now being driven by the private sector, which is overtaking state-owned enterprises as the dominant force in the economy. From a credit perspective, the more balanced growth helps improve the overall fundamentals for Chinese corporates, which are tapping into both onshore and offshore markets for new bond issuance or re-financing.
The aforementioned economic backdrop was reflected in the lower default rate for Asian corporates. Moody’s reported that the Asian trailing 12 months non-financial high yield corporate default rate was at 1.5% at the end of June 2017, which was lower than the 4.9% at the end of June 2016. During the same period, default rates in the U.S. fell to 3.8% (from 5.5% in the previous year) and those in Europe stayed flat at 2.7%.1
Asian high yield credits remain attractive. In particular, Chinese property companies continue to enjoy strong contract sales with improving selling prices and profit margins. We favour higher yielding big developers which have gone through deleveraging of their balance sheets. In other sectors, we like selective department store operators with high asset coverage. Turning to Southeast Asia, S&P’s raised Indonesia’s credit rating to investment grade. We are satisfied with liquidity condition of Indonesia corporates, especially those in commodity and property sectors.
Meanwhile, China is opening up its onshore bond market to overseas investors. It is the third largest bond market in the world, but only 2% of bonds are foreign-owned. Investment opportunities are emerging in investment grade bonds issued by the Chinese government, policy banks, and state-owned enterprises, which offer attractive yields with low credit risk.
1. Default Rates: (Moody’s Investors Service, August 2017)
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This is a sponsored article from BEA Union Investment Management Limited.
