Aviva reweights HY bonds from India to China

Added 25th May 2015

Asian high yield bonds are undergoing a turnaround phase this quarter as the prospects of Chinese issuers improve following monetary easing measures, according to Tim Jagger, senior vice president and portfolio manager for Asian fixed income at Aviva Investors.

Aviva reweights HY bonds from India to China

Moreover, receding worries over the property sector have prompted Aviva to increase allocation toward China.

“We are re-weighting away from India and Indonesia toward China [in the Asian High Yield Bond Fund],” Jagger said in an interview with Fund Selector Asia.

He turned bullish on Asian high yield this year after China continued to cut interest rates. 

“The catalyst has been the monetary policy environment in China. Largely, the constituents of the [Asian high yield bond] index are cyclically exposed, such as property, construction materials and various industrial companies.”

These companies are likely to benefit from China’s accommodative monetary stance.

“We do see more RRR and interest rate cuts. The trend is your friend for a little while.”

Since November, the People’s Bank of China has cut both the interest rate and banks’ reserve requirement ratio (RRR) three times each in a bid to stimulate economic growth. The market still expects further easing moves.

“We do see more RRR and interest rate cuts. The trend is your friend for a little while.”

He added that Asian corporate high yield is currently attractively valued relative to US high yield, and it trades cheap to European high yield bonds. 

Property worries receeding

Apart from easing measures, there are now fewer worries over Chinese high yield property bonds, which went through a volatile period in the first quarter due to financial problems faced by troubled developer Kaisa Group.

“We had a lot of governance concerns in the first quarter, which are receding now. A lot of people were focussing on the Kaisa situation”. 

The government took measures in March to boost the weakening property sector, which included lowering the down payment for second home buyers. 

“If you look at contract sales for main developers in China in April, they have shown very strong month-on-month or year-on-year growth in sales.”

Jagger prefers B-rated bonds over BB-rated ones.

 “A lot of BB-rated bonds have been in vogue. But they have low spreads and have seen greater volatility recently.”

Yuzhou Properties, a B-rated bond is one example, where he raised exposure recently.

“The default outlook for Asia as a whole is quite benign. So we are quite comfortable in taking credit risk without taking risk into distressed investments. BB-rated issuance has greater correlation to interest rates compared to B-rated papers. That is why we have migrated to B-rated issuances.”

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