Asia’s New Balance: High-Yield Market Offers More Diversity, Lower Risk

27 June 2024

5 min read

Diwakar Vijayvergia| Portfolio Manager—Asia Fixed Income

Thierry V. Taglione, CAIA| Managing Director and Head—Fixed Income Business Development, Asia ex-Japan

The Asian high-yield market is evolving faster than investor perceptions.

After a turbulent few years caused by the shakeout in China’s property sector, the Asia high-yield bond market has found a new equilibrium based on sound fundamentals, attractive valuations and strong returns. We think it’s time for investors to consider its growth potential and diversification benefits.

China may no longer be the global growth powerhouse it once was, but its GDP growth—for now and the foreseeable future—remains well ahead of Western economies’, as does the growth of India, Indonesia and Asia generally, presenting a significant opportunity for global investors (Display).

Asia Offers Attractive Economic Growth Prospects

GDP forecasts for 2025 range from 6.8% in India and 5.0% in Indonesia to 1.8% in the US and 0.8% in Europe.

Analysis provided for illustrative purposes only and is subject to revision. Current analyses and forecasts do not guarantee future results.
GDP forecasts are year over year, except US, which is fourth quarter over fourth quarter.
As of March 31, 2024
Source: AllianceBernstein (AB)

High-yield bond investors may view the prospect with mixed feelings, given the Asia high-yield market’s poor performance after Chinese real estate companies began defaulting on their debt in 2021. But the market has made a remarkable recovery, outperforming its counterparts with a year-to-date (through May 31) return of 9.1% compared with 1.6% for the US high-yield market, 3.2% for European high-yield, and 2.8% for the global high-yield market.

But returns tell only part of the story. The Asia high-yield market has changed structurally, offering investors a much-improved risk-reward profile. To understand these changes and what they mean, it helps to know a little about the market’s recent history.

China’s Presence in the Index Has Shrunk

Until a few years ago, investors seeking exposure to high-yielding debt issued by Chinese companies saw the Asia high-yield market as a logical inclusion in their portfolios. At one stage, Chinese companies accounted for as much as 45% of the noninvestment-grade corporate component of the JP Morgan Asia Credit Index (JACI HY). Most of these (35%) were real estate companies.

That all changed in 2021, when China Evergrande Group, one of the country’s biggest property developers, began a series of debt defaults, triggering an industry-wide crisis. The level of Chinese government support for the industry fell short of investors’ expectations, and the attraction of the market evaporated—as did much of the country’s presence in the index. Mainly because of property-company defaults and liquidations, China’s share of the JACI HY fell from 38% in 2021 to 25% by March 2024, while its share of the index’s real estate sector fell from 23% to slightly more than 7%.

Today, the market has a more even balance of countries and sectors. China still dominates, but much less than it used to, and other countries—notably India, Pakistan, Thailand and the special administrative regions of Hong Kong and Macau—now account for more of the index. Among sectors, financials have displaced real estate as the index’s biggest component, and sovereigns, consumer and utilities have increased their shares too (Display).

The Asia High-Yield Market Has Become More Diversified

As of March 31, 2024
Source: J.P. Morgan

The increased share of financials in the index—the proportion of financial credits to corporate credits has risen from 11% in 2015 to 22% in March 2024—implies greater stability, as Asian banks have generally high credit quality, many being either owned or supported by their governments. The greater exposure to India, which is expected to lead the region’s growth over the next few years, helps to underpin the market’s outlook for positive returns.

Valuations Compare Favorably with Non-Asia Markets

Asia’s high-yield market compares favorably with its global peers on a several measures. From a valuations perspective, its current yield to worst is 13%, significantly higher than emerging-market, US and global high-yield markets (6.7%, 7.7% and 8.1%, respectively). These returns also compare well on a risk-adjusted basis, with credit ratings in each of these markets ranging between BB and B (Display).

Asia Credit Offers an Attractive Risk/Return Profile

Current analyses do not guarantee future results.
US and European indices are from Bloomberg; Asia credit is represented by the J.P. Morgan Asia Credit Index and EM corporates by the J.P. Morgan CEMBI Broad Diversified Index. Hedged into US dollars
As of March 31, 2024
Source: Bloomberg and J.P. Morgan

After 2019, credit metrics in Asia came under pressure because of COVID, but they remain sound. Earnings before interest, tax, depreciation and amortization (EBITDA) and net income margins fell, while net debt-to-EBITDA rose, from 2.1 times in 2019 to 2.8 times in 2023. The ratio of EBITDA to interest expense also fell but, at 5.6 times, remains healthy. Liquidity (cash to total debt) is lower but remains adequate, in our view, at 30%.

Except for the 2007‒2009 global financial crisis and Chinese real estate defaults from 2021 to 2023, the historical default rate for Asia high-yield has mostly been low. Now that China’s presence in the JACI HY is smaller, and with fiscal and monetary-policy settings supporting Asia’s growth outlook, we expect defaults to continue to fall (Display).

Default Rates for Asia High Yield Are Likely to Decline in 2024

Defaults from 2009 through 2023 show huge spike and peak in 2022 at 16.5%. AB forecast for 2024 is 6.9 and just 0.1 ex China.

Historical and current analyses do not guarantee future results.
AB’s 2024 default-rate forecasts are calculated by dividing the total amount of expected default by the total amount of debt outstanding in the Asia high-yield universe.
As of March 31, 2024
Source: J.P. Morgan and AB

There are other reasons, besides structural changes, for investors to take a fresh look at Asia high yield, in our view.

Diversification and Positive Return Potential

The market’s 13% yield is well above its historical average of 8%, suggesting that current valuations are a good entry point. For now, the high yield provides a cushion against any potential increase in yields and corresponding decline in bond prices; once US rates begin to fall, we expect high-yield markets to attract more attention from fixed-income investors, with the Asian high-yield market among those in the spotlight.

In our view, the Asia high-yield market should continue to grow, despite the past 12 months’ lull in issuance. Asian companies are capital constrained, and as they grow—many of them at rates likely to be several percentage points above the forecast nominal growth rates for their countries—they will need to access US dollar funding through the Asia high-yield market.

With a more balanced risk/reward profile and strong growth prospects, we think the Asia high-yield market offers investors the benefit of diversification and the potential for positive returns.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Diwakar Vijayvergia

Diwakar Vijayvergia is a Senior Vice President and Portfolio Manager on the Asia Fixed Income team, focusing on Asia Pacific and emerging-market fixed-income strategies. Prior to this he was a senior credit analyst on AB’s Credit Research team specializing in Southeast Asia and India corporate credit. Vijayvergia has worked as a credit analyst since 2006 and has covered multiple regions, sectors and capital structures. Before joining the firm in 2018, he was a senior vice president and head of credit strategy at Jefferies International, focusing on high yield and distressed credit in Asia. Prior to that, Vijayvergia was a senior desk analyst for eight years at RBS, covering global distressed opportunities, private financing and performing credits. He holds a BCom (honors) in accountancy from the University of Calcutta and an MBA in finance from the Indian Institute of Management. Location: Singapore

Thierry V. Taglione, CAIA

Thierry V. Taglione is a Managing Director and Head of Fixed Income Business Development in Asia ex-Japan. He is responsible for leading a team of investment strategists and for driving growth efforts for AB’s global fixed-income platform across Asia. Investment strategists work closely with AB’s portfolio management and sales teams and focus on articulating AB’s market views and portfolio strategies with clients, prospects and consultants globally. Prior to joining AB in 2022, Taglione was a managing director and head of client portfolio management for the Asia-Pacific at Manulife Investment Management in Hong Kong. Prior to this, he was a fixed-income portfolio specialist at Fidelity International in London, advising clients based in Europe and the Middle East, and was a product analyst at Franklin Templeton in San Mateo, California. Taglione began his career in 2005. He holds a BA in economics from the University of Paris XI; an MS in finance from Emlyon Business School, France; and an Executive MBA from Harvard Business School. Taglione is a Chartered Alternative Investment Analyst (CAIA) and holds a CFA Institute’s Certificate in ESG Investing. Location: Hong Kong

Asia’s New Balance: High-Yield Market Offers More Diversity, Lower Risk

China’s Presence in the Index Has Shrunk

Valuations Compare Favorably with Non-Asia Markets

Diversification and Positive Return Potential

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