Ask the Expert with Manulife Investment Management: What is the State of Sustainability and Credit Markets in Asia?

Based in Singapore, Murray Collis is Deputy Chief Investment Officer, Fixed Income Asia ex-Japan & Head of Fixed Income Singapore and lead portfolio manager of the Singapore-based fixed income strategies, including the Sustainable Asia Bond strategy. He also contributes to the pan-Asian fixed income team in the management of pan-Asia strategies.

Sebastian Culpan-Scott: What should investors take away from the Evergrande saga? What do you do as a portfolio manager to mitigate the risks of investing in China? Despite all the negative headlines, could there be opportunities?

Murray Collis: We are constructive on Asian credit and believe there are opportunities in China high yield at the moment, particularly within the property sector, which has been under pressure as a result of the uncertainly created by Evergrande but also intensified by lower profile smaller issuer defaults. Yet despite the negative headlines around Evergrande and the Chinese property sector overall, we think investors should be looking closely at this market given the value which is being offered compared to other global markets. The high yield component of the J.P. Morgan Asia Credit Index is currently yielding at around 10% while China high yield is yielding 13%, and the China property names within that are closer to 19%. Looking at this from an historical viewpoint these valuations are very compelling.

"We are constructive on Asian credit and believe there are opportunities in China high yield at the moment, particularly within the property sector."

We believe that fears are ultimately overdone and that the market is being driven more by sentiment at this point. Stepping back and looking at the risks, we see the market level default rate of 30-40% currently being built into the high yield market as too pessimistic. That said, we do expect ongoing idiosyncratic risks and short-term volatility term and therefore there is a clear need to be selective. However, we believe the risks can be mitigated by comprehensive bottom-up credit research and active credit security selection (which includes considering rating and tenor).

Sebastian: Amid China’s ‘common prosperity’ drive, do you see the recent regulatory curbs continuing in China?

Murray: We’re closely following the evolving situation onshore in China and how any regulatory curbs may impact sectors, such as technology or real estate, within our market in the short term. Interestingly, what we’re now seeing is policy makers moving towards fine-tuning the implementation, and in our view, many sectors, like property, should ultimately emerge stronger and head into a more sustainable era of growth. We do expect the ‘common prosperity’ drive to continue, aimed at addressing perceived inequalities which have emerged in the economy over the past decades such as working conditions and the burdens of education. However, we believe that the medium-term aim is to provide a more balanced economy which will likely offer support for good quality issuers in the market through less polarised income distribution and a rebalancing of consumption.

"We believe that the medium-term aim is to provide a more balanced economy which will likely offer support for good quality issuers in the market through less polarised income distribution and a rebalancing of consumption."

Sebastian: Where do you see the key investment opportunities in both sustainable Asian fixed income and the broader Asian fixed income market?

Murray: In 2020 we saw a series of pledges across the region, from China, South Korea, Indonesia, among others, to achieve net zero carbon economies. In order to meet these targets, we believe the Asian credit markets will be pivotal to the net zero transitions. Issuance in the Asia-Pacific region (excluding Japan) continues to grow, up from $31.9 billion in H1 20201 to just under $95 billion in H1 20212 with corporates the key issuers of green and sustainability bonds while governments have dominated the social bond market to date. In recent years, we have seen a strong increase in issuances from renewable energy companies and property developers. However, going forward we expect issuance to diversify and filter out as companies look to decarbonise and work towards the net zero commitments their own governments are targeting, and this will create further opportunities for sustainable investors.

Looking at the Asian fixed income space more broadly, as mentioned earlier, despite default concerns in the Chinese property sector, Asia high yield bonds remain an attractive investment opportunity, offering higher yields and lower interest rate sensitivity than global peers.

Sebastian: What about the risks over the next 12 months?

Murray: From a global perspective, we are watching closely for the risk of slowing growth and upside inflation prints. We do expect some moderation in global growth as central banks look to tighten monetary policies while some of the fiscal spending starts to trail off. Persistent higher inflation also presents a risk with general market consensus at the beginning of the year being of the view that inflation would be transitory, but as the year has worn on it’s become more cost-push than demand-pull.

The article continues on page 9 of the special report: Sustainable Asia: The continuing evolution