Faced with a slowing economy, we believe Beijing has shifted its focus away from tackling the country’s medium-term structural problems. The priority now, in our view, is supporting the economy, including the debt-ridden property sector where building activity and property sales fell after stricter controls were imposed.
We expect policy support for real estate developers to increase. This should, in our view, lead to a normalisation of the credit spreads for both Chinese real-estate bonds and the broader high-yield (HY) debt market in Asia. We believe this constitutes an attractive investment opportunity.
The current level of spread differentials between Asia and US HY makes Asia HY valuations look attractive.
Versus emerging market peers, Asia HY admittedly has weaker metrics, but this is not new. Based on our assessment , current valuations look attractive, particularly to high-conviction investors such as us. They offer scope for appealing returns if, as we expect, Chinese policymakers extend further support to the Chinese economy, with positive consequences for the real estate sector.
We also see Asian investment-grade (IG) debt as attractive relative to other emerging market and developed market IG bonds.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.