Investors drawn in by the bumper premiums on offer in Asia’s high yield bond market had a rough couple of years in 2021 and 2022: burned by China’s property downturn, the JPMorgan Asia Credit Non-Investment Grade Index (JACI NIG) slumped 11 and 15 per cent in each year respectively.
Things improved in 2023, and the clear-out of the market has left space for change and delivered a 6.8 per cent gain in the opening months of 2024.
Why Asia high yield looks to be over the worst
The make-up of the market has transformed, and with it the risk profile. In 2019, years of dollar-denominated debt sales in the offshore market meant about a third of JACI NIG-listed bonds came from Chinese property companies and over half the index from mainland issuers more broadly.
Those numbers have shrunk. With new debt sales wound down, mainland Chinese names now amount to 25 per cent of the index while India’s share has almost doubled and Macau’s more than tripled. The share of Chinese property issuers is only 4 per cent after dozens of them defaulted. The market is stronger - no longer heavily dependent on the fate of a single sector, with a more balanced and diversified pool of issuers.
Healthier spread of issuers
Beyond China property, the rest of Asian issuers’ fundamentals have held up relatively well. In the past four years, the net debt-to-EBITDA ratio of Asian high yield issuers, excluding Chinese real estate firms, has held at around five times1 in the face of events ranging from the US Federal Reserve’s hiking cycle to regulatory crackdowns in China and a range of geopolitical uncertainties. The cash-to-total-debt ratio has also been stable within a range between 25 per cent and 30 per cent.
Asia’s emerging markets are still growing far faster than their peers in Europe and the United States. And the strong momentum is expected to continue, bolstering corporate earnings and credit quality. Emerging and developing Asia, led by India, is projected to grow 5.2 percent in 2024, compared with 2.7 per cent in the US and 0.8 per cent in the euro area2. Inflationary pressure is expected to stay benign, easing the problem of rising costs for companies.
Backed by that picture, Asian high yield borrowers’ default rate is estimated to have dropped to 10 per cent in 2023 from 16.8 per cent in 20223 and we expect it to fall steadily from here. The rate for Asia ex-China high yield issuers was only 1.7 per cent on average from 2013 to 2023, compared with 2.3 per cent for US peers.
Reasons for the premium
Asia high yield bonds offer higher returns than their peers: the average yield-to-maturity is 10.7 per cent, compared with the 8.4 per cent for similar bonds in broader emerging markets and 7.4 per cent in the US. There are reasons for this premium: Chinese names still make up almost a third of the market and there are still concerns over the fate of both the Chinese economy and the regulatory backdrop.
Average duration is just 2.4 years, compared with 3.2 for US high yield bonds and 3.7 for emerging market high yield. That could shield investors against the volatility caused by ongoing uncertainty over US inflation. And elevated US interest rates have led many Asian corporate borrowers to choose local-currency debt issuance over hard currency alternatives, subduing new bond sales and boosting the attractiveness of the asset class.
Chinese issuers may return eventually, but they are unlikely to be the single dominant force again. The lesson is learned: a balanced and diversified landscape is what the market needs for sustainable growth and stable income generation.
Sources
1: According to JPMorgan data.
2: “World Economic Outlook, April 2024,” International Monetary Fund, https://www.imf.org/en/Publications/WEO/Issues/2024/04/16/world-economic-outlook-april-2024
3: According to JPMorgan data.
