[FMQ&A] Manulife & Natixis: Asia High Yield – High on Opportunities

Key points:

• Asia high yield has many benefits such as attractive yield opportunities, and its short duration profile helps to protect against rising interest rates
• Some of the sectors within Asia high yield that are favoured by fund managers, include China, India and renewables
• Default risks and uneven economic recoveries are some key risks investors should be mindful of when investing in Asian high yield funds

Asia high yield has been popular with investors in recent times. The widespread of COVID-19 has affected many global economies, though with efficient measures put in place to reduce the spread of COVID-19, many Asian countries are now in a better state from when COVID-19 first made its appearance in their country since early 2020. With a positive outlook for most Asian economies in the near future, we believe Asia high yield has room to flourish.

With the Asian High Yield universe spanning across a wide range of geographical markets and sectors, there are also many different strategies and areas of focus within the Asian High Yield Fund space for investors to uncover opportunities.

In this article, we interview the investment teams behind Manulife Global Fund – Asian High Yield fund and Natixis Loomis Sayles Asia Bond Plus fund to find out their takes on the Asia high yield sector and the investment merits for this sector.

FSMOne.com (FSMOne): At FSMOne.com, we believe Asia High Yield offers the most attractive credit opportunity and is our top Fixed Income pick in 2021. As Portfolio Managers of your respective funds, tell us why you believe Asia High Yield Funds deserves investors’ attention in 2021?

Manulife: We believe the fundamentals of Asia stand out – North Asian economies have generally demonstrated superior COVID-19 containment measures relative to the rest of the world, putting Asia in an advantageous position to better shape for potential upside as vaccines roll out globally. Looking at Asia high yield corporate issuers on average, debt service and liquidity ratios were generally maintained at moderate levels. In addition, we believe the short duration characteristics of Asia high yield (c. 3 years) makes it a compelling asset class for investors globally, especially in current market environment of rising long-term US yields year-to-date. Asia high yield offers relatively attractive credit spread and yield opportunities for investors. If you take a closer look at the factors contributing to rising US yields this year –one of the driver is growth expectations gaining momentum– this factor in turn is supportive for credit spreads, which could help offset some of the rising US yield movements. Furthermore, the relatively attractive credit spreads translate to yield opportunities for investors – Asia high yield bonds on average have a yield-to-maturity of around 7%.

Natixis: Asia High Yield Funds deserve investor attention in 2021 for five key reasons:

1. Asia’s relatively high regional growth rate
2. Corporate balance sheet resilience
3. Increasing interest from foreign investors
4. Attractive yield
5. Low interest rate sensitivity 

Global growth is poised for a sharp recovery in 2021 and Asia, supported by China, will lead the way. China’s ability to combat and contain the COVID-19 virus allowed the country to stave off a full year negative GDP print in 2020, an impressive achievement given the deep contraction across most global economies. China’s ability to restart growth means its corporates are at a comparative advantage versus the rest of the world. Asian corporates came into the pandemic on firm fundamental footing and while credit metrics modestly deteriorated in 2020, we expect leverage metrics to move lower as revenues recover to pre-pandemic levels. The pickup in growth supports a benign 2021 default outlook. Early default forecasts for Asia high yield stand at 2.4%, marginally lower than the broad EM universe at 2.5% and a full percentage point lower than US HY at 3.5% (Source: JP Morgan, as of 1/6/21).

Asian investors have historically dominated the Asia high yield credit buyer base, but we see rising participation from yield hungry US and European managers since the global stock of negative yielding debt remains elevated and developed market fixed income spreads offer little value. The Asia high yield index has a current YTW of 6.8% (JP Morgan JACI Non-IG Index, as of 2/25/21). With US high yield yielding 4.1% (Bloomberg Barclays US HY Index, as of 2/25/21), the near 300bps advantage offered by Asia high yield is attracting attention.

As the economy recovers, interest rates will rise from the very low levels of recessionary conditions. The short maturity profile of Asia high yield protects against rising interest rates. 

FSMOne: What is one key strategy that you have used for your respective fund’s positioning in 2021? How does the portfolio's yield, duration and credit profile differ from the benchmark, and what is the rationale behind the positioning?

Manulife: We believe credit selection remains key for Asia high yield in 2021, as the recovery is expected to be uneven across countries and sectors. Our strategy will be focusing on Asian corporate issuers with a straightforward business model, providing highly predictable liquidity profiles in various economic scenarios.

Our Manulife Global Fund – Asian High Yield portfolio’s current yield is 5.8% versus benchmark of 6.6% (Benchmark: JP Morgan Asia Credit Non-Investment Grade Index, as of 28 Feb 2021); this is reflective of the portfolio’s relatively higher average portfolio credit rating of BB- when compared to the benchmark of B+, as we focus on Asian corporate issuers with a relatively predictable liquidity profile and are typically associated with a higher credit rating. The portfolio’s duration is 2.6 years (as of 28 Feb 2021), in line with the benchmark but relatively short within the global fixed income universe.

Investors should not be blindly picking Asia high yield bonds or portfolios by yield statistics, as they could be prone to “yield traps”, where relatively “higher" yields could reflect depressed security prices (the dominator of yield formula) due to deteriorating credit fundamentals of the issuer. On the other hand, we believe “doing-your-research-homework” and portfolio risk management are vital, especially for Asia high yield asset class given the asymmetric return profile and credit events may persist as the recovery path is likely to be uneven in 2021.

Natixis: Investing in the Natixis Loomis Sayles Asia Bond Plus fund is investing in Asia’s long term structural growth story. Because of the size and influence of China in the Asia high yield index, we seek to add diversification to the Asia opportunity set through the introduction of an off-benchmark “Plus” regional component (the Middle East, emerging Europe, and Africa). The “Plus” region enhances the strategy’s opportunity set by increasing exposure to sectors which are generally underrepresented in the Asia high yield space, including telecom, media and technology (TMT), oil & gas, metals and mining, and consumer.

We maintain our preference for names linked to the cyclical global growth recovery. In China, we are overweight credits with exposure to the domestic economy and the Chinese consumer. Given the improved outlook on India growth, we have meaningfully increased exposure to the industrial, infrastructure and metals & mining sectors. In the frontier sovereign space, we see strong opportunities within the Plus region, including Egypt and Ukraine, two countries that benefit from a credible IMF policy anchor and an improved external position.

The fund offers a distinct yield advantage with modestly longer duration than the benchmark. We see opportunities for alpha extraction across the credit spectrum, the fund selectively allocates to the investment grade Asia credit opportunity set based on relative value, especially versus the double B segment and the higher quality non-rated segment of the index. The fund currently holds higher exposure in single Bs versus the index as this segment is poised to benefit from macroeconomic tailwinds.

	Manulife Global Fund – Asian High Yield	Natixis Loomis Sayles Asia Bond Plus Fund
Duration	2.6	3.08
YTM	5.8%	7.82%
Average Rating	BB-	B1
Source: Manulife Global Funds, Loomis Sayles, data as of 28 Feb 2021

FSMOne: With the COVID-19 impacting global markets, and with governments showing varying degree of successes containing the pandemic, are there any major changes, in terms of geographical or sector that you have made to your respective funds over the past 1 year? Which markets and sectors within the Asian high yield space?

Elsewhere, we also favor India’s renewables sector. As Asia continues to grow, its need for energy rises; the region is forecast to account for nearly two-thirds of the world’s new power demands in the next 20 years, with China and India leading the charge.¹ India plans to install 100 gigawatts of solar power capacity by 2022 (up from about 35 gigawatts in 2020²), having managed to generate solar energy in a manner that’s cheaper than coal.³ We believe this segment will create many entry points for fixed-income investors.

Natixis: In 2020, the Asia Bond Plus fund dynamically repositioned across countries and sectors. In the early stages of the pandemic, we reduced the risk budget to China with the view that the country’s aggressive lockdown efforts would contain the virus but come at a great cost to domestic growth. As the virus spread beyond China’s borders, we further cut risk in the fund by reducing exposure to commodity-linked credits. In March 2020, it became clear that COVID-19 had shifted from a regional virus into a worldwide pandemic and we added back exposure to defensive, higher quality China names. We viewed China, given its litany of domestic policy tools, as best prepared to address COVID-19 related challenges.

As policy makers stepped up monetary and fiscal support, we looked for opportunities to selectively add back risk into the fund. We saw two sectors, Technology, Media, and Telecom (TMT) and consumer, as well-positioned to benefit from the global policy response. The TMT sector was a clear beneficiary of COVID-related lockdowns, as the need for connectivity and technology solutions was never more important. In the consumer space, we saw the massive fiscal effort of policy makers supporting demand. As markets stabilized in the 2^nd half of 2020, we further redeployed risk from higher quality positions to higher beta opportunities. We added to idiosyncratic credits in the India metals and mining and renewables sectors, Malaysia leisure and gaming space, the Indonesia property sector and increased exposure to some Asian frontier sovereigns.

Into 2021, we prefer economies anchored to manufacturing and industrial production. We see manufacturing economies as well-positioned to capitalize on the tailwind from developed market stimulus. We also see commodity exporters, particularly in metals that help the economy to transition to lower emission are well-positioned for outperformance in 2021. 

FSMOne: Which is one key risk that you will be paying the most attention to in 2021? For investors who are already invested in Asia High Yield, are there any important developments / data sets that they should be keeping a close eye on this year in 2021?

Manulife: We continue to pay close attention to credit default risks, as we expect the recovery to be uneven across countries and sectors in Asia. Furthermore, we will also monitor the distribution of vaccine across Asian economies, as implementation delays are likely to have repercussions to the path of recovery and credit default risk.

We are mindful of potential cross asset class contagion risk –given other risk asset classes may be on the rich-end of the valuation spectrum– and subsequently impact Asia high yield in a global risk-off environment when correlations move towards one.

Natixis: We remain optimistic that broad-based vaccination efforts will be successful. However, vaccinations programs will not be uniform, and access and distribution will result in uneven economic recoveries. It continues to be important to monitor regional trends in COVID-19 cases and track vaccination efforts as localized COVID-19 outbreaks resulting in shutdown and mobility restrictions might cause speedbumps on the road to recovery.

For those already invested in Asia, we see pockets of vulnerability that may lead to stress in the Asia high yield credit market. The Chinese government, while remaining focused on financial stability, will also continue with its aims to reduce leverage in the corporate system. The recent deleveraging policy measure targeted at the property sector, known as the three red lines, has had significant impacts in the market. While the policy measures seek to ensure stability to the systemically important sector, its implementation has led to pockets of strain within the property space. We expect policy implications to continue well into 2021.

Conclusion

With Manulife and Natixis sharing their key insights on Asia high yield, here are some takeaways from their responses.

Both Manulife and Natixis believe that the Asian economy will continue to grow with many attractive aspects to Asian high yield. Within Asia, as China achieved significant progress in containing the COVID-19 pandemic and saw a swift economic recovery, coupled with the domestic policy tools that they have to address challenges posed by the pandemic, investment managers from both fund houses continue to hold positive views on China, which is also the highest country allocation in both funds’ portfolio. India is also another country that both Manulife and Natixis believe will take the lead with its high growth potential and there are also many sectors like renewables, industrial and more which investors could look out for.

Both investment managers also pointed out the risks associated with Asian high yield that investors should be aware of, including default risks and risks of uneven economic recovery due to certain Asian regions having limited access to vaccinations, and this is where we believe active management could become a key differentiator for investors when it comes to investing in the Asian high yield space.

A look into the country and sector allocation of both funds suggests that the Manulife Asian High Yield fund may face higher geographical concentration risk but relatively lower credit risk, while on the other hand, the Natixis Loomis Sayles Asia Plus bond fund has a lower geographical concentration risk with its “plus” component, but could potentially face higher credit risk, presenting investors with differing risk profiles two opportunities as they invest in the wide-ranging Asian High Yield space. The high yield and low duration aspect of both funds also protect investors from rising interest rates, and the yields are also highly attractive in the context of the current low yield environment.

References

¹ “Can Solar Power Compete With Coal? In India, It’s Gaining Ground,” Wall Street Journal, February 17, 2020

² “India aims for half of state-run fuel stations to be solar-powered in five years,” Reuters, September 15, 2020

³ “India leads with lowest renewable cost in Asia-Pacific,” Wood Mackenzie, July 27, 2019

Manulife and Natixis Asian High Yield Investment Teams

Manulife:

Endre Pedersen

Deputy CIO, Global Fixed Income & CIO, Asia (ex-Japan) Fixed Income

Jimond Wong, CFA, CPA

Managing Director, Fixed Income – Portfolio Manager, Pan-Asia Bonds

Neal Capecci, CFA

Managing Director, Fixed Income – Portfolio Manager, Pan-Asia Bonds

Murray Collis

Deputy CIO, Asia (ex-Japan) Fixed Income & Head of Singapore Fixed Income

Fiona Cheung

Head of Credit, Asia (ex-Japan)

Thierry Taglione, CAIA

Asia Head of Client Portfolio Management & Fixed Income Client Portfolio Manager

Natixis:

Elisabeth Colleran, CFA

Vice President, Loomis, Sayles & Company

Portfolio Manager for emerging markets debt portfolios

Thu Ha Chow

Portfolio Manager and Senior Credit Strategist, Emerging Markets Debt team, Loomis Sayles Investments Asia Pte. Ltd.