As a debt crisis in the Chinese property developers, old playbooks have to be rewritten, Asian junk bond investors are looking to smaller pockets of the market.
Chinese real estate notes have been one of the most profitable trades in the world. A record string of defaults has caused the nation s junk notes to tumble almost 27% in 2022, causing the nation s junk notes to drop almost 27% in 2022. A worldwide debt rout has created a game of losing less. Money managers point to high-yield securities from India and Southeast Asia as alternatives in this new era.
Their bonds have a range of risks from vulnerability to U.S. rate hikes to depreciation in their home currency, but they have fallen less than regional peers this year. The Indian notes have lost nearly 11% of their value and Southeast Asian high-yield securities have lost 7.2%, compared with a 19% drop in the region's junk debt excluding Japan.
According to Dhiraj Bajaj, head of Asia fixed income at Lombard Odier in Singapore, the shape of the Asia high-yield market will change permanently to be one with a lot less China. He said that issuance of higher quality bank capital instruments from India, Southeast Asia, Australia and parts of North Asia will likely see a rise.
In Asia, the majority of dollar junk bonds are sold in Asia, but their share has decreased: they made 61% of issues this year, compared to 76% in 2020 when China Evergrande Group s troubles repaying its massive borrowings caused the nation s debt crisis.
That prompted Asian high-yield dollar corporate note issuance to slide 86% this year, an even bigger drop than for global counterparts amid a worldwide debt rout.
The country wants to target 50% of the generation capacity from non-fossil fuels by the year 2030 due to the shrinking menu of options.
Amy Kam, senior portfolio manager at Aviva Investors Global Services Ltd., said that the country s ambition to triple capacity by 2030 is reflected in the growth from Indian and Indonesian high-yield markets.
Since March, authorities have been unveiling measures to help alleviate stress in the credit market, including cutting key interest rates, supporting bond sales by builders and taking stakes in some firms. But that hasn't stopped the wave of defaults, while offshore bond investors have suffered more losses than local counterparts.
The implications of the systemic default wave out of China property are grave, said Bajaj. For perhaps a decade or two, the sudden changes in policy, significant amounts of hidden debt by private companies, lack of debt resolution mechanisms when defaults happen, and inherent bias toward subordinating offshore bondholders won't go unnoticed and unforgotten. He said that investors are considering alternatives like so-called crossover credits with BBB ratings, additional tier 1 subordinated bank capital notes and high-yield credit in emerging markets outside Asia.
AllianceBernstein likes very solid BB rated names in Asia excluding China, especially utility firms and developers in China's real estate sector that will be able to survive, said Jenny Zeng, co-head for Asia Pacific fixed income at the firm. She said China still needs the sector.
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