Fixed income investors prefer emerging Asia bond issues

MANILA, Philippines - Standard Chartered Bank said that the fixed income market is looking for higher returns and the Asia emerging markets hold better opportunities than the developed markets.

Peter Kok, regional head for ASEAN of Standard Chartered said that investors have already developed a taste for corporate credit over sovereign issues.

“Bond markets performed very well in 2014 and certainly better than what was expected at the start of the year. Heading into 2015, income generation will still be one of the key objectives for clients/investors,” Kok said.

The bank regional head has a bias on emerging markets, and a further preference for emerging Asia.

“Among the emerging markets, we prefer Asia due to its stronger growth compared to other emerging markets, relative stability and now additional tailwinds due to lower oil prices,” he added.

The recent commodity linked sell off in some of the markets like Russia and Brazil and the slowdown in China created pockets of opportunity in the region. However, taking into account the risk-reward trade off, Asian credit still looks good.

A quick look at the Asian IG corporate balance sheets show that the corporates maintained stable credit fundamentals in 2014.

On the other hand, the fundamentals for high-yield corporates have selectively deteriorated because of slower economic growth and higher balance sheet leverage.

The Chinese property sector, which is the largest component of high-yield credit universe, still faces challenges of lower property prices and rising inventories.

In addition, lower commodity prices could also lead to futher pressure on the smaller oil and gas sector and mining companies.

Kok said that the Asian US dollar bond market is large enough to offer investors a wide choice of issuers and capital structures.

Investors can also selectively go down the capital structure of high-quality companies. This offers higher yields compared to senior debt of the same issuer for a slight increase in credit risk.

For instance, perpetuals from high quality corporates with bond-holder friendly structures (like high coupon step-up, shorter call date etc.) offer opportunities to capture higher yield. Similarly for banks, subordinated debt has emerged as a large sub-asset class.

Some investors even view subordinated debt issued by Chinese banks as an attractive, less volatile alternative to Chinese high yield corporate debt.

Over the last decade, Asian local currency bond markets have also evolved to supplement the G3 currency bond markets.

Chinese renminbi (CNY) and Indian rupee (INR) bonds stand out as the top picks within the Asian local currency bond universe.  Bonds in both local markets offer attractive yields (approximately three to four percent for China and seven to eight percent for India) for investment grade credit quality.

China has already begun cutting rates, while India is expected to do so in 2015 which could potentially lead to capital gains in addition to the carry, thereby enhancing total returns.

Singapore dollar corporate bond market is another important investment avenue for investors holding SGD deposits.

“For all local currency bonds, our preference is for larger and more liquid benchmark bond issuances,” the Standard Chartered bank regional head stated.

Meanwhile, Lynette Ortiz, managing director and head of Global Markets, Standard Chartered Philippines said that the Philippine capital markets have been vibrant and robust with significant increases over the years in issues and issuers across a broad range of products and formats from plain vanilla bonds to Basel III compliant Tier 2 notes.

Presently, the Philippine Dealing System fixed income exchange has 31 issuers, 88 securities and total outstanding issues of P470 billion end 2014 coming from P277 billion in 2012.

“We are a market that is clearly and purposely working on developing the proper infrastructure – benchmarks, disclosure and settlement mechanisms – are all concurrently being improved to ensure we have the platform to meet requirements of corporate and institutional issuers and investors.”

Ortiz added that access to a deeper local capital market helps issuers in their expansion plans and financing requirements, particularly when the offshore markets are buffeted by various shocks and volatilities.                     

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