Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Supported by Asia’s dynamic economic growth, the Asian high-yield bond market is proving attractive for investors. We spoke to Neuberger Berman’s Emerging Market Debt team about the market and how an Asian high-yield fund can look from a sustainable perspective.
AsiaFundManagers.com: Why should investors consider sustainable Asian high-yield bonds when interest rate hikes in the West are making bonds attractive again?
Sean Jutahkiti: The growth of Asia High Yield over the past 10 years has been exponential and has become a significant part of the Emerging Market universe, with this segment offering higher yields compared to the US and European high-yield markets with similar ratings and shorter duration. Asia forms a large and resilient part of the global economy, and has seen resilient growth over different cycles. Countries such as Indonesia and India have experienced structural changes to their economy that have improved the resilience and growth potential of their economies. They are beneficiaries of improving profitability from China’s re-opening and a release of pent-up consumer demand. Now that the bottom in Asia High Yield is behind us, the market is much ‘cleaner’ than last year and we believe the present yield offered to be very attractive.
AsiaFundManagers.com: How do the risk and return profile of sustainable Asian bonds differ from conventional bonds?
Sean Jutahkiti: While the data on sustainable investments is still evolving, initial studies suggest that bonds and portfolios with better or improving ESG and Sustainability characteristics have a lower risk profile and lower cost of funding. The ever-changing regulatory landscape on various ESG issues, such as cleaner energy suggests entities that incorporate these factors in their forward plans will, in our view, outperform the broad market over the long term. However, ensuring the framework and use of proceeds from the issuer are in line with international best practice are critical to long-term outperformance.
AsiaFundManagers.com: What are the criteria you apply to sustainable Asian high-yield bonds? What is distinctive about your in-house ESG rating?
Prashant Singh: At the portfolio level, we target lower carbon emissions, overall higher ESG ratings and allocate at least 50% of our holdings to sustainable investments versus the benchmark. With respect to the issuer level, we have an in-house ESG rating that considers material factors for each sector and also incorporates our in-house sovereign quotients. Depending on the score, we will either upgrade or downgrade companies overall credit rating. We believe such a process gives a more balanced perspective by combining both the financial metrics with ESG. The sustainability assessment leverages multiple data points that measure the alignment of a company’s economic activity with environmental or social objectives.
AsiaFundManagers.com: What are the main sectors in Asia where sustainable investment opportunities exist for your portfolio?
Prashant Singh: In terms of sectors with sustainable investment opportunities in Asia, we see significant potential in renewable energy, particularly in India. The financial sector also presents opportunities as it serves as a channel for the growing capital needs in sustainable investments in Asia. We emphasize the importance of labeled bonds that provide clear objectives, but we exercise caution to avoid greenwashing and have an in-house process to ensure the principles of the labeled bonds are in line with our views.
AsiaFundManagers.com: What impact has the recent banking stress in the US and Europe had on Asian banks? What does this mean for your portfolio strategy?
Prashant Singh: The recent banking stress in the US and Europe has had minimal fundamental impact on Asian banks. Due to their mainly domestic funding sources, Asian banks are insulated from tighter funding conditions. Many of the Asia banks have significant government ownership or are systematically important as well as the percentage of Tier 1 (T1) capital that comes from Additional Tier 1 (AT1), is significantly lower than the developed market. Additionally, most of their AT1s are issued in the domestic market with a sticky investor base. In fact, Asian banks have outperformed during the banking stress period. While there have been distortions in the high-yield market in particular the AT1 segment, we see opportunities arising from the banking stress.
AsiaFundManagers.com: You have strong exposure to China and real estate. How do you assess the outlook for the housing market today? What risks should be avoided?
Sean Jutahkiti: The share of China in the Asia high-yield index has declined significantly in the past year as a large number of Chinese Real Estate credits have defaulted and exited the index. While risks remain in the sector for the remaining survivors, we believe risks are priced in. We expect authorities to stabilize the sector without anticipating a strong rebound which we have seen in the first quarter of 2023. Going forward, we expect the rebound in the sector to be more gradual than before, as the government continues to emphasize its policy of “houses are for living” we believe valuations in this sector offer a lot of opportunities. We focus on stronger names that will benefit from policy support.
AsiaFundManagers.com: How do you assess the default risks of sustainable Asian high-yield bonds in a more difficult macroeconomic environment?
Sean Jutahkiti: Assessing the default risks of sustainable Asian high-yield bonds in a more difficult macroeconomic environment, we note that the primary driver of default rates in Asia is the China real estate sector, which is more influenced by Chinese policy than the global macroeconomic environment. In a more challenging macroeconomic environment, there is a stronger motivation for Chinese authorities to be supportive of the sector. Outside of the Chinese Real Estate sector, we expect defaults to remain low. We see sector tailwinds supporting India’s renewables, and the recovery in the consumer sector has resulted in positive outlook revisions. Moreover, most Asia corporates have domestic funding sources and are not heavily exposed to the global macroeconomic cycle, which highlights the diversification benefits.
AsiaFundManagers.com: Thank you very much for the interview.
Sean Jutahkiti is Head of Asian Credit Research on the Emerging Markets Debt team, Neuberger Berman.
Prashant Singh is Lead Portfolio Manager (Asia) on the Emerging Markets Debt team at Neuberger Berman, co-managing the Sustainable Asia High Yield Fund.
