Asia investment grade looks attractive

Added 27th February 2015

Aviva Investors is cautious on investment grade credit spreads in Asia in the short term, but has a more constructive view on the asset class in the medium term given attractive valuations.

Asia investment grade looks attractive

The asset management company said it sees negative investor sentiment toward Asian investment grade bonds in the near term due to factors such as a large increase in new issuances in the pipeline and the default problems of Chinese property developer, Kaisa. 

Notwithstanding these concerns, Asian investment grade bonds look appealing in the medium term with a spread pick up of at least 70 basis points relative to US and European investment grade credit.

“Asia also remains a small part of global investor allocations, though we believe that as issuance increases and the search for global relative value grows, there will be an increased demand going forward for Asian credit in global portfolios.”

Macro conditions across the region are also supportive of the asset class. 

“China has started on an easing cycle along with structural reforms while Korea has easy monetary conditions and India also has a loosening bias. There are strong signals of structural reform in Indonesia and the oil price fall provides a welcome boost to most economies and consumers across the region.

“Asia is a standout beneficiary in a global emerging market context from the oil price fall. With capital expenditure and merger activity unlikely to play a key role in 2015, the fundamental position remains accommodative for corporate and this should underpin spreads.”

Aviva Investors likes Chinese state-owned oil and gas companies and BBB-rated Chinese property companies.

On the other hand, the firm has a mixed view on the financial sector, and is resultantly underweight on both Indian and Chinese financial companies. 

It prefers Indian private sector banks to public sector counterparts, but believes valuations for Indian issuances remained stretched.

“We are also underweight China financials as they are challenged fundamentally, though the government is showing support.”

Asian bank subordinated debt generally remains a high conviction overweight position for the firm, with Singapore, Malaysia and Australia the preferred countries. 

“These securities are attractive on a valuation basis and we are also confident that they will be redeemed at their first call date, which is an ongoing positive for spreads in the sector.”


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