HONG KONG, Oct 31 (Reuters) – Bond fund managers whose strategies focus on high-yielding Asian issuers have switched to cash and other non-Chinese assets after suffering huge losses in the Chinese bond market. corporate bonds.
Once a sought-after investment that accounted for more than half of high-yield corporate bond issuance in Asia, China’s property sector has seen a record number of defaults in 2022 among major private developers and even some state-owned companies.
Capital outflows triggered by the Federal Reserve’s aggressive interest rate hikes have dealt another blow to this already fragile segment.
Monica Hsiao, founder and chief investment officer of Triada Capital, an Asia-focused long-short credit fund, says she hasn’t seen this kind of challenge in an investment career spanning more than 20 years.
“We currently hold more than 50% cash, more than ever before,” said Hsiao, who founded the fund in Hong Kong in 2015.
Hsiao, who managed credit in Asia for London-based asset manager CQS before founding Triada, did not disclose the size of the fund or its performance.
More than two dozen Moody’s-rated Chinese property developers have defaulted since the start of 2021, pushing the number of high-yielding junk-rated Asian companies to an all-time high.
Many holders of Chinese high-yield bonds have seen them trading below 20 cents on the dollar. Defaulted bonds of property company Sunac China (1918.HK) maturing in 2025 are trading at 6 cents to the dollar.
The average yield of Asia’s top 10 high-yield bonds has fallen more than 30% this year, according to Morningstar data, including Fidelity Funds’ Asian High Yield Fund and UBS’s SICAV – Asian High Yield ( USD) had lost more than 40% as of October 27.
The property sector, crucial to China’s political and economic stability, saw a sharp drop in prices and sales after policymakers imposed tough restrictions on developer borrowing in mid-2020.
Hsiao said investors were hoping for policy action to support real estate demand this year, but that hasn’t happened.
Hsiao continued to reduce his fund’s exposure to China from the first quarter and turned to cash during the summer months, when the threat of inflation in the United States and geopolitical risks increased. .
“NON-INVESTABLE” ASSET CLASS
Gordon Ip, investment director for fixed income at asset manager Value Partners, says the fund has reduced its overall exposure to Chinese real estate and bought Indonesian and Indian bonds this year, mostly in the sectors energy or resources and renewable energy.
Value Partners’ Greater China High Yield Income Fund was down 37% at the end of September. The fund’s assets fell to $611 million from $980 million at the end of April.
“This year has been extraordinary in terms of risk management,” said Ip. “Rising rates, soaring inflation, geopolitical tensions and intense sector risk (Chinese real estate) have made it extremely difficult to navigate the market.”
Ip said the fund has stayed liquid by trying not to “over-own” a particular issue and making sure it always has a reasonable level of cash.
Bond investors are generally sitting on their laurels and already looking ahead to next year, said Nicholas Yap, head of credit bureau analyst Asia Flow at Nomura.
Investors don’t see China’s real estate debt markets recovering any time soon, given not only regulatory risks but also the differential treatment by several sponsors of onshore and offshore bondholders in the restructuring process.
“There is no reliable restructuring process in China that coordinates between onshore and offshore,” Hsiao said, adding that she saw virtually no willingness to negotiate among failing issuers.
While there are bonds on the rise, Chinese high yield as an asset class is currently “uninvestable,” she said.
“We are in the middle of a perfect storm. We hope for the best, but we prepare for the worst,” she said.
Reporting by Summer Zhen; Editing by Vidya Ranganathan and Muralikumar Anantharaman
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