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Asian bonds back on track

Category: Asia, Hong Kong

HSBC Global Asset Management recommends long-term income generation over short-term profit-making

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The Asian bond market appears to have gathered pace again following the slowdown in new issuance last year. This resurgence is mainly due to the improving appetite for fixed income as well as the continuous growth of the CNH bond market, according to HSBC Global Asset Management.

HSBC Global Asset Management is among the top performers in the Asian fixed income space with around US$30 billion AUM as at December 31 2011. Cecilia Chan, CIO of fixed income, Asia-Pacific at HSBC Global Asset Management, notes that market sentiment overall was very choppy last year. The bond market experienced significant sell-offs stemming from the credit downgrading of US Treasuries and market concerns over the European debt crisis, she reveals, which led to a reduction in new issuance of Asian bonds. Credit spread performed badly in August and September last year.

In spite of the market distress, the firm’s Asian Bond Fund outperformed many equity markets and riskier asset classes in general to deliver a return of around 4% last year. The firm’s award-winning Asian fixed income team has been managing local and regional portfolios for over 16 years. “With this experience, we’ve witnessed and navigated markets in different cycles, which is unique given the development of Asian fixed income investment today is not about uncovering hidden gems, but the risk control to ensure income investors have a smooth ride,” explains Ms. Chan.

Ms. Chan states that the fund is currently structured with two-thirds in investment grades and one-third in high yield bonds. “The fund has been sitting in a low risk profile but has offered a high, single-digit annual return on average over the past ten years. With its attractive risk-reward profile, it makes sense to have it as a core holding for investments.”

According to Ms. Chan, the purpose of investing in Asian bonds should be for long-term income generation rather than short-term trading or profit-making. “If there are too many short-term investors in the fund, it will create unnecessarily high transaction costs.”

In terms of investment strategy, Ms. Chan says she takes factors such as duration, split between investment grade and high yield, and split between sovereign and corporate bonds, into consideration when it comes to constructing the fund’s portfolio. “For example, we were underweight on duration slightly and overweight corporate last year. Recently, we have added exposure to banks and some high yield corporate such as the coal and energy sectors.”

Ms. Chan states that the firm has strong investment capabilities – the Asian fixed income team includes 11 fund managers and five credit analysts based in Hong Kong. The team is also supported by the regional teams based in Asia, as well as the global investment process and global credit research platform. On top of this, HSBC Global Asset Management has more than 30 seasoned sector-specific analysts over the world. “We have developed a strong culture of research leveraging our global credit platform,” notes Ms. Chan.

The Asian bond market has been performing well so far this year, which has been underscored by an increase in new issuance.

“We’ve seen some catch-ups in the new issuance market so far with focus on investment grade credits. More high-yield corporate bonds are expected to gradually come into the market this year in view of the growing investors’ risk appetite,” she claims. “In terms of pricing, the new issuance has been fairly priced and hence well-digested by the market, which also helps the credit spreads to stay at a reasonable range.”

On Dim Sum bonds, Ms. Chan says the CNH bond market has gone through a period of price normalisation. “The price of the CNH bonds was very expensive and the yield was very low at the beginning of last year, due to an imbalance in supply and demand. The excessive demand drove the yield for offshore RMB denominated bonds to a very low level, but the market gradually corrected over the year. By the end of last year, the CNH credit spreads traded much closer to that of comparable USD credits. As a result, CNH bond investors become more fairly rewarded for the credit risks they have borne.”

In addition, the maturity profile of the new issuance in the CNH bond market has generally been extended from one-to-three years to three-to-five years. This offers better yield pick-up opportunities for investors to benefit from the positive sloped credit spread curve.

Ms. Chan points out that due to HSBC’s dominant position in Hong Kong’s financial market, “We are in a great position to leverage the Group’s expertise as we have access to top class RMB research and underwriting.”

She adds: “Over time, we expect more new issuance with longer-dated maturities, as well as more foreign issuers coming into the CNH bond market. This will be very helpful for future market development, as it provides a wider investment universe that will attract more international investors to participate in the market and subsequently improve liquidity in the secondary market.”

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