The market had been tarnished by Chinese developer defaults. But a lower reliance on the China real estate sector has brought Asian high yields back into favour

There was a time when you could not escape news of yet another Chinese property giant facing severe financial difficulties. Defaults by such high-profile property developers as Evergrande and Country Garden added to the highly negative sentiment. As a result, from the start of the crisis in May 2021 to its low in November 2022, the Asian high yield sector lost nearly half its value.

However, the market has since bottomed and this year, its popularity appears to be on the mend. Returns are up by 11 percent year-to-date, far exceeding the 2 percent returns for global high yields and 4 percent returns for Asian investment grade bonds.

China’s fading dominance

There are many reasons for the Asian high yield market’s recovery, including its very attractive yield, (currently around 8 percent, i.e. more than double that offered by MAS 6-month T-bills). But perhaps most reassuring for investors is the fact that the market is no longer dominated by Mainland China and Chinese property developers.

Today, the proportion of Mainland China-based issues is around a fifth of the Asian high yield market. This is in stark contrast to 2019, when Chinese property high yields comprised a third of the market, and China overall made up over half the market.

With this drop, the geographic spread has widened considerably with markets like Hong Kong, Macao, India and Philippines featuring more prominently among the Top 10 largest Asian issuers of high yield bonds.

Figure 1: Top 5 high yield bond market exposure by country weight (%),
July 2024 (vs Dec 2019)

Source: Bloomberg/UOBAM, based on the Bloomberg Asia USD High Yield Diversified Credit Index (USD)

More diversity across industries

As a result, the industry mix is also looking healthier, with financial, retail, metals and mining, and gaming companies among the biggest issuers, while Chinese property issuers now account for less than 5 percent of the market.

In particular, the bigger role being played by the financial industry is a positive for the market. Asian banks and financial firms tend to have better credit fundamentals, and many are wholly or partially owned by their respective governments.

Bond issues from Asian corporates and sovereigns also tend to be shorter duration than their broader emerging market counterparts, and even their US counterparts. As of May 2024, the average duration of the Asian high yield bond market was just 2.5 years, compared to 3.2 years for US issues and 6.5 years for emerging markets, making it less vulnerable to price volatility.

Figure 2: Top 5 high yield bond sector exposure (%), July 2024

Source: Bloomberg/UOBAM, based on the Bloomberg Asia USD High Yield Diversified Credit Index (USD)

Asia’s growth is becoming more balanced

This mix of greographies and sectors reflects Asia’s future. Once powered by the economic expansion in a single country - China – the region looks set for a larger number of growth engines. The International Monetary Fund (IMF) estimates that Asia will see 4.3 percent GDP growth for 2025.

This is more than double that of the US’s 1.9 percent. But as importantly, country contributions to this growth are set to change. Compared to 2023, China and India’s growth are expected to slow, whereas ASEAN countries will see faster growth.

Figure 3: Real GDP growth (year-over-year % change), 2025E vs 2023

Source: IMF/UOBAM, April 2024

Going forward, this more evenly distributed growth profile suggests that the Asian high yield bond market will diversify further. The clearout of defaulted or distressed China property issues has brought down the default rate for Asian high yields from a high of 16.8 percent in 2022 to an estimated 4.5 percent in 2024.

In coming years, given Asia’s potentially strong economic and corporate earnings growth, the default rate should return to long term averages, especially given the reduced dominance of China real estate bonds. For example, Asian high yield default rates in the 2010 – 2019 decade prior to Covid, ranged from 0.6 to 3.1 percent.

Good entry point

These positive factors have not gone unnoticed by investors. As a result the spreads (ie the difference in yield between Asian high yield bonds and Asian investment grade bonds) have been tightening steadily since the end of 2023.

Nevertheless, compared to the US and European high yield markets, Asian spreads are still higher. Excluding China, Asian corporates are achieving better yields on their high yield bonds than similarly-rated bonds issued by US or European corporates.

This suggests that the Asian market is over the worst but remains relatively cheap and offers a good entry point for investors who do not want to take on Asian equity risk but are looking for substantially higher income than fixed deposits or T-bills. Furthermore, after this week’s Fed meeting, a September rate cut is looking even more likely, so locking in current yields has become even more urgent.