The article first appeared in The Edge Singapore.
Investing in quality: key to dependable income
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Asian high yield outlook
Investing in quality is important
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.
Asian high yield outlook It’s a question of taking appropriate risks
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.
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Asian high yield outlook
Sustainability: a long-term theme in Asian high yield
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.
Tap the opportunity in Asian high yield bonds
1 Source: UBS Asset Management, as of 31 Jul 2020. Past payout yields and payments do not represent future payout yields and payment. Payout yield does not equal to total return and is not guaranteed. Equivalent yield is derived from simple arithmetic calculation where the dividend is divided by the NAV, and annualised thereafter. Please use this for reference only. This share class which pays distribution may distribute not only investment income, but also realised and unrealised capital gains or capital. Where capital is distributed, this will result in a corresponding reduction in the value of Shares, and a reduction in the potential for long-term capital growth.
Ross Dilkes is a portfolio manager with the Pan Asia fixed income team and has strategy responsibility for selection of corporate issues in Pan Asian portfolios. Ross also contributes to the development of sector and industry allocation strategies across Pan Asia portfolios.
Ross joined UBS Asset Management in December 2005 as a credit analyst within the European Credit Research team based in London.
Ross transferred to the APAC Fixed Income team located in Hong Kong in 2009 where he was responsible for credit research coverage of APAC investment grade and high yield issuers.
Prior to joining UBS Asset Management, Ross worked for Debtwire in London as an analyst covering high yield, distressed debt, leveraged finance and restructuring situations.
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