Funds bet on recovery in Asian junk-rated credits as defaults peak while China’s property bonds struggle to end rout
- Some funds that invest in the asset class have narrowed their losses after two years of beating as debt defaults dwindle
- Recent forbearance for workouts involving Dalian Wanda, China South City offers positive signal, while others manage to term out maturity in tight funding market
Asian junk bonds could be the surprise package for credit investors in 2024 as the worst of bond defaults has passed and global borrowing costs decline, some money managers said. A turnaround may be imminent as losses in funds that invest in the asset class narrowed in recent months.
Investors are betting that the Federal Reserve will lower borrowing costs next year, helping ease funding strain and liquidity stress for junk-rated borrowers including Chinese developers. That should refuel risk appetite, making the asset class ripe for a rebound after a three-year slump, they added.
“We are past the worst of the default rate cycle in Asia,” said Sheldon Chan, a portfolio manager in London at T. Rowe Price. “Defaults have really been driven by China property, and the remaining risk stack is significantly lower now.”
“What has been somewhat overlooked in recent years is the resilience of the asset class,” he said in an interview in Hong Kong. “There has been so much ample funding available in local markets, that a lot of companies have been able to term out maturity profiles without having US dollar bond access.”
Chan co-manages the US$27.5 million Asia Credit Bond Fund, which has gained 8.7 per cent this year, versus 3.4 per cent peer average, according to Bloomberg data. His top holdings at end-November included bonds sold by the Indonesia, lenders DBS Group of Singapore and Development Bank of the Philippines, and Sun Hung Kai Properties.