Asian Credit Strategies As 2021 begins, market risks favour HY
- 25 January 2021 (5 min read)
Key points
- Potential for rising rates, low overall yields, and a large spread differential with HY limits IG appeal
- Wide dispersion of spread within HY underscores a high level of idiosyncratic risk
- Careful credit selection along with a significant spread cushion justifies HY positioning over IG
What’s happening?
The J.P. Morgan Asia Credit Index (JACI) ended the tumultuous year in positive territory, delivering +0.64% of total return in December. A total of 10 bonds from 7 issuers defaulted within the JACI that closed the year with a default rate at 1.24%. As of 31st December, the index was represented by 612 issuers, with a market capitalization amounting to US$ 1.20 trillion. December’s good performance was driven by tighter spreads, which outweighed weaker interest rates. Credit wise, HY names (+1.96%) significantly outperformed their IG counterparts (+0.20%), benefitting from more spread compression, as well as more cushion against rising interest rates, owing to shorter structural duration. The Sovereign segment bottomed the performance chart, dragged by the worst mover Sri Lanka (-3.56% on December). The year-end also saw the JACI’s Yield to Worst falling below the psychological barrier of 3% - a record-low - driven by the drop in Interest Rates, while Biden’s strong fiscal stimulus plan suggests higher rates for 2021. The JACI’s spread level ended the year around 28 bps above its January level, most sectors have fully recovered with spreads trading near their pre-Covid marks, particularly on the IG space. Heading into 2021, there seems to be more room for spread compression on HY, credit differentiation will be key amid a fragile outlook.
Monthly Returns
| J.P. Morgan Asia Credit Index (JACI) +0.64% | |||||
| Investment Grade +0.25% | High Yield +1.96% | ||||
| Corporates +0,39% |
Sovereign -0,08% |
Quasi-Sov +0,14% |
Corporates +2.30% |
Sovereign -0.98% |
Quasi-Sov +0.46% |
Portfolio positioning and performance
| Key Strategies | Performance | |
| Country/Sector: | OW exposure on China Property and Indonesia was beneficial, as well as UW on Frontier Sovereign. Our neutral Indian positioning was helped by a positive selection effect , driven by VEDLN’s rally. | + |
| DTS: |
Maintained neutral DTS for AHY and reduced DTS for ASD. The short duration biased was helpful amid rising interest rates |
+ |
| Bottom-up: |
Selection effect was slightly negative on balance, mainly dragged lower by our UW on EVERRE that saw some retracement in December, costing 16 bps of relative performance. OW positioning on VEDLN and THSCPA was beneficial. |
- |
Outlook
The year has begun with quick reminders to both investment grade and high yield investors what risks need attention in 2021. A quick surge in UST yields on the heels of victories for Democrats in Georgia’s runoff U.S. Senate races has created losses for investment grade bonds, particularly those of longer duration. Much less sensitive to rising UST yields, Asian high yield bonds are off to a positive but choppy start. Higher yields mean higher risks both in the form of fundamental challenges and sentiment driven volatility, both of which have been on display early in 2021. Low nominal yields and a potentially rising interest rate environment have clearly diminished the appeal of investment grade bonds and pushed more investors into high yield exposures where there is a 400 to 500 basis point spread pickup. This provides a lot of cushion for periods when bond prices fall and, conversely, offers the opportunity for total return enhancement credit trends improve and an issuer’s bond spreads compress. High yield China property developers and Indonesia corporates maintain attractive yield levels but idiosyncratic risks as a result of high leverage, poor governance, liquidity challenges and operational challenges exacerbated by the pandemic require careful consideration. In such an environment, investor sentiment as well as supply and demand technical factors should not be overlooked for investors with limited loss tolerance. With careful credit selection, we remain in favour of high yield exposure over investment grade with portfolios positioned for shorter duration. With a weak to stable USD unhedged, higher yielding local currency can be considered.
No assurance can be given that the Asian Credit Strategy will be successful. Investors can lose some or all of their capital invested. The Asian Credit Strategy is subject to risks including Credit risk, Liquidity risk, Derivatives and leverage, Investments in specific countries or geographical zones, Sovereign debt, Emerging markets, High yield debt securities, Contingent convertible bonds.
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This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.
Disclaimer
This website is published by AXA Investment Managers Australia Ltd (ABN 47 107 346 841 AFSL 273320) (“AXA IM Australia”) and is intended only for professional investors, sophisticated investors and wholesale clients as defined in the Corporations Act 2001 (Cth).
This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Market commentary on the website has been prepared for general informational purposes by the authors, who are part of AXA Investment Managers. This market commentary reflects the views of the authors, and statements in it may differ from the views of others in AXA Investment Managers.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.