Nikko Asset Management (Asia), the biggest asset manager based in the region, is making junk dollar bonds of Chinese developers its top pick for 2013 even after their biggest gain in three years.
China accounted for 37.3 per cent of its US$503 million flagship Asian High Yield fund, up from 26 per cent in March, according to fund data. The share of real-estate bonds rose to 28 per cent from 21 per cent over that time. Tokyo-based Nikko manages US$166 billion in Asia.
Chinese high-yield bonds returned 31.5 per cent this year, the most since 2009, compared with 13.2 per cent in the United States, Bank of America-Merrill Lynch indices show.
"Monetary conditions are easing and sentiment among homebuyers is still positive," Leong Wai Hoong, a fund manager in Singapore, said. As the Communist Party meets to select new leaders this month, he said "economic stability is a priority for the incoming leaders and China is unlikely to implement further restrictive measures".
Bank of China mutual funds are also favouring developers, while ING Investment Management has boosted holdings, after Premier Wen Jiabao's policy of cutting borrowing costs while curbing speculation prolonged a four-year bull run.
Bonds issued by Country Garden, KWG Property, Shimao Property and Agile Property are in Leong's top 10 holdings. His fund returned 18.1 per cent this year and 8.2 per cent in 2011. Five developers are in the top 10 list of a fund managed by BOCHK Asset Management in Hong Kong.
Chinese companies' notes rated BB-plus and below by Standard & Poor's, which mostly comprise developers, yielded 9 per cent on average, compared with 6.5 per cent for the US High Yield Master II Index. The 250-basis-point spread is the least this year and compares with 710 basis points at the start of 2012.
The narrowing gap prompted Nikko to buy more longer-maturity BB notes and those ranked single-B for extra yields, Leong said. That boosted returns amid a surge in fund inflows fanned by global monetary easing, he said.
Contracted sales at 11 major developers were 57.3 billion yuan (HK$71.3 billion) in October, up 41 per cent from a year earlier, according to Ryan Li, an analyst at JPMorgan Chase in Hong Kong. It was the best month since developers started releasing monthly data in January 2009.
ING was "substantially overweight" Asian corporate bonds, having raised its bets in China and India, Joep Huntjens, a regional credit-fund manager said. ING manages US$5.1 billion of Asian bonds from Singapore. Signs of an economic rebound suggested Chinese debt would outperform and attractively priced bonds were still available, he said.