SINGAPORE (July 2): The reopening of China’s economy is one of the key drivers for Asian high yield bonds, according to UBS Asset Management (UBS-AM). 

However, Ross Dilkes, who manages the UBS Asian high yield strategy, believes that investors should be “quality” conscious and aware of liquidity constrains when investing in the asset class. This is because markets will continue to be volatile. 

Dilkes shared that the portfolio increased its cash holdings earlier this year. This, he explains, has helped the strategy ride through extreme volatility then. The liquidity buffer is still useful now as volatility could persist and it also provides the flexibility to take advantage of possible dislocations in changing market conditions. 

Investing in quality names is also important as after all, the Asian high yield universe has an average credit rating of B+ and default risks are real.

“At the start of 2020, our estimates for defaults were around 3% for the year. But given the different circumstances now, we have revised this to 5-6%. At this level, investors in Asian high yield bonds are still well compensated for those risks given that yields are still around historical highs,” Ross explains. 

Dilkes adds that the UBS Asian high yield portfolio has an average credit rating of BB, which reflects “notches of quality” above the universe average. 

However, this does not necessarily mean that the portfolio will shy away from opportunities down the credit ratings spectrum for the sake of quality. Dilkes says the strategy buys bonds for returns that commensurate with the risks. 

“The question is always are we taking appropriate risks when buying the lower spectrum of quality of the market,” he says. “For us, it is about having a blend of assets across the credit spectrum. We don’t just target B or BB rated names. I think we must look at it on a dynamic basis.” The balancing strategy of quality and liquidity meant that the performance of the UBS Asian high yield strategy was resilient especially in the face of market challenges in March this year.

 Sustainability a long theme 
Policy-makers’ active, over-arching push towards sustainability practices is another driver that will help investors gain an attractive risk-adjusted return from the asset class, Dilkes reveals. 

Dilkes says the push for renewable energy is gaining momentum. Governments around the world are rebalancing the energy mix to be less reliant on fossil fuel sources and more on renewable ones, he says. As such, government policies are providing all kinds of support to companies operating in this space. “This is an interesting long-term theme,” he says. 

According to the International Renewable Energy Agency (IRENA), renewable generation capacity increased by 176GW or 7.4% in 2019. Solar energy continued to lead capacity expansion, with an increase of 98GW or 20%, followed by wind energy with 59GW or 10%. Hydropower capacity increased by 12GW or 1% and bioenergy by 6GW or 5%. Geothermal energy increased by just under 700MW. 

From a geographical perspective, Asia accounted for 54% of new capacity in 2019, according to IRENA. This increased the region’s renewable capacity by 95.5GW to 1.12TW or 44% of the global total. Capacity in Europe and North America expanded by 35GW or 6.6% and 22GW or 6.0%, respectively. Oceania and the Middle East were the fastest growing regions at 18.4% and 12.6% respectively, although their share of global capacity is small. Africa has a similar amount of renewable capacity, but this only increased by 2.0GW or 4.3%. 

Against this backdrop, Ross sees opportunities in India. Although the country’s economy has gone through a rough patch in the last 12 months or so, he notes that there are several solar and wind energy companies with strong fundamentals there. “They are quite attractive in terms of outlook and strength in managing those businesses,” he says. 

Importantly, the performance of these companies is not directly correlated to the macro environment in India. “We’ve seen that in terms of the performance of the assets in the past six-to-12 months past, they’ve actually been outperforming. At starting point, their yields were lower than others in this space, but they were more resilient,” says Ross. 

As at end May, the UBS Asian high yield portfolio holds bonds issued by privately held Azure Power Energy. The company is a solar power producer in India, with a portfolio of over 7GW under various stages of completion. The strategy also owns bonds issued by Renew Power, a clean energy independent power producer in India. The company has a total capacity of 8.65GW, derived from a mix of solar and wind energy projects. 

For those considering Asian high yield bonds, China’s re-opening is a boon. And with yields at levels last seen during the Global Financial Crisis, now’s an attractive entry point. What’s more, as the sustainability theme gains traction, investors could be heartened to know that the UBS Asian high yield strategy is actively exploring opportunities there.

Visit ubs.com/am-sg-ahy to know more.

ubs

If you are interested in the UBS Asian high yield solution, please contact your relationship managers from:


This document and its contents have not been reviewed by, delivered to or registered with any regulatory or other relevant authority in APAC. This document is for informational purposes and should not be construed as an offer or invitation to the public, direct or indirect, to buy or sell securities. This document is intended for limited distribution and only to the extent permitted under applicable laws in your jurisdiction. No representations are made with respect to the eligibility of any recipients of this document to acquire interests in securities under the laws of your jurisdiction. Using, copying, redistributing or republishing any part of this document without prior written permission from UBS Asset Management is prohibited. Any statements made regarding investment performance objectives, risk and/or return targets shall not constitute a representation or warranty that such objectives or expectations will be achieved or risks are fully disclosed. The information and opinions contained in this document is based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any misrepresentation, errors or omissions. All such information and opinions are subject to change without notice. A number of comments in this document are based on current expectations and are considered “forward-looking statements”. Actual future results may prove to be different from expectations and any unforeseen risk or event may arise in the future. The opinions expressed are a reflection of UBS Asset Management’s judgment at the time this document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed. You are advised to exercise caution in relation to this document. The information in this document does not constitute advice and does not take into consideration your investment objectives, legal, financial or tax situation or particular needs in any other respect. Investors should be aware that past performance of investment is not necessarily indicative of future performance. Potential for profit is accompanied by possibility of loss. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice Source for all data and charts (if not indicated otherwise): UBS Asset Management. © UBS 2020. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.