Fidelity: China risk for Asian high yield

Added 9th May 2016

The big challenge for China is deleveraging, according to Bryan Collins, fixed income portfolio manager.

Fidelity: China risk for Asian high yield

Among the funds Collins manages is the Fidelity Asian High Yield Fund, which about than 70% exposure to assets with credit ratings of either B or BB, according to FE data. The fund has 88% exposure to Asia-Pacific bonds, mainly corporate. 

He said that because China poses a credit risk, it is a big concern for broader Asian high yield bonds.

China’s corporate debt risks are rising amid an economic slowdown. GDP grew 6.7% year-over-year in the first quarter, the slowest since 2009. The IMF in April said that loans at risk in China make up 15.5% of total bank loans, or $1.3trn. The country’s corporate bond defaults have significantly increased year-to-date.

"If we see aggressive deleveraging, or some other kind of event that could impact the stability of China’s financial system, that clearly is going to be a risk,” Collins told FSA.

However, China risks should not be overplayed, he said.

"We are not concerned about a rapid devaluation of RMB, or a collapse of the Chinese economy or asset prices. They are not a core thesis, as the probability of these events is very small.

“While there are some structural challenges within China, the big challenge is leverage. Each additional unit of leverage has a diminishing impact on growth. So every time you have more [fiscal] stimulus -- as we have seen in Japan and other markets -- it can only give you a little bit of growth. [Chinese companies] still need to deleverage.

He added that he is confident China will be able to control its capital account and its currency.

His view is in contrast to Schroders, which warned that risk is growing for the currency to significantly devalue. Standard Life Investments also expects that the RMB will come under renewed pressure, as Beijing’s efforts to stabilise the RMB are likely to be short lived.

More stable environment?

Collins remains positive on the outlook for Asian high yield bonds over the next six to 12 months.

In a year when increased volatility in global markets is widely expected, he believes high yield will be less volatile than equities.

"It’s the income that adds up that [accounts for] the bulk of the return. Generally speaking, Asian corporates, both investment grade and high-yield, are fundamentally quite sound and they are generally in a good spot. We are not looking at excessive leverage across the corporate landscape.

"We are also not looking at valuations or yields that are ridiculously low compared to other parts of the world. So, you’ve got a good mix of yield and income, and generally speaking, pretty good corporates,” he said.

Collins also believes that the operating environment for Asian high yield bonds has become more stable and less sensitive to monetary policy changes globally.

“I don’t think we need to be concerned about aggressive rate hikes in the US, or other parts of the world. Global central banks remain highly accommodative and supportive, and the PBOC is taking a bit of a pause right now [in cutting interest rates].

“That means if we are thinking about taking duration risks or interest rate risks, it’s important [that] you can manage it. Currency volatility is probably less of an issue because we are in a more stable environment when it comes to monetary policy globally. The concept of competitive devaluation is probably a little bit overdone."

The main idea is to focus on the individual companies, he added.



FE data shows that Collins has performed better than the peer group composite over the last six years.

"Over a fairly lengthy track record, the manager has, period by period, consistently managed to outperform the peer group. There is not sufficient data to say whether good stockpicking has had any real effect on results, which have not been particularly exposed to falling markets," according to FE.



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