The world has been living with low interest rates for over a decade, and it is expected that low-yield environments will continue to persist, at least in developed markets. Investing in Asian high-yield bond markets could be a way out during an uncertain environment, especially for investors who wish to generate stable income and preserve their purchasing power.
Asian high-yield bond issuers generally receive less scrutiny from market participants, including credit rating agencies and investment managers. As such, pricing inefficiencies will exist in the Asian high-yield bond market from time-to-time. In the past decade, the Asian high-yield bond market has had a significantly shorter average duration than global investment grades and United States and European high-yield markets. Asian high-yield bond markets provide a way for investors to achieve returns and lower their portfolio duration at the same time.
When it comes to Asian high-yield bonds, many investors are concerned about the default risks involving Chinese companies, but they need to keep in mind that Mainland China is the world’s third largest bond market and is still growing. With the commencement of the Bond Connect between Hong Kong and Mainland China, the Asian high-yield bond market could be assessed by more investors in the future. For investors who want to capture pricing inefficiencies in the market, the ability to accurately assess the credit quality of Asian high-yield issuers is the key to successfully investing in such bonds.
Constructing an Asian high-yield bond portfolio
In order to construct an optimal portfolio with increased returns in the Asian high-yield market, investors could begin with a top-down assessment of the corporate bond market, including a consideration of macroeconomic conditions, corporate earnings, relative valuations and expectations of future default rates. Investors could also focus on sector positioning. Different sectors perform differently in different economic cycles and sector rotations generally take place as market views of the economic cycle change. Accurate sector positioning could potentially provide investors with increased returns.
After assessing the macroeconomic environment, the next step is to conduct fundamental credit research. Asset managers usually analyse the issuer’s financial statements in an effort to understand whether its capital structure is suitable for the risk entailed in its business. They understand the issuer management’s intentions, in terms of business development and capital structure, and their ability to execute their plans. Asset managers will also view and decide the allocation to credit ratings as inherent to the fundamental credit analysis, as Asian high-yield bond market credits may have ratings that do not properly reflect their true credit quality.
A typical portfolio is constructed with a sector allocation that focuses on Asian high-yield market credit with at least 30 bond issuers. Investors should also strive for the portfolio to be well-diversified at both issuer and industry levels. After constructing the bond portfolio, investors should continually review existing holdings, including the monitoring of market risk, duration and volatility, and credit risk.
By using a value-driven, disciplined and diversified approach, investing in the Asian high-yield bond market can potentially provide investors with increased yields with limited volatility throughout market cycles and less duration risk than the broader Asian bond market. I believe one of the most attractive features of the Asian bond market is that it tests an investor’s ability to use diligent fundamental research to identify issuers with the credit metrics that provide additional yields to investors.
About the e-learning course
In an e-learning course entitled “Harnessing Asian Bond Market,” I share my investment experience to help participants learn more about investing in Asian bond markets. The course will benefit CPAs who would like to increase their understanding of the characteristics of Asian bonds and the strategies for investing in them. A better understanding of bond mechanisms can also benefit chief financial officers of listed companies, who may use this new knowledge to tap into Asian high-yield bond markets. The course will guide participants to identify and invest in Asian bonds through opportunities in the fixed income securities spectrum. Growing market liquidity, higher potential returns and diversification opportunities will encourage more investors to allocate their assets to Asian high-yield bond markets, which is an important asset class that we cannot ignore.
Alex Chow has extensive experience in financial markets and asset management. He works as an investment manager in a Hong Kong-based hedge fund company. Prior to joining this company, He worked with several Hong Kong-listed companies that focus on real estate projects and hedge fund investments. Chow graduated from The Chinese University of Hong Kong with major in Quantitative Finance and is a Chartered Financial Analyst, Certified Financial Risk Manager and a member of Hong Kong Mensa.