Opportunities within a fast evolving and diverse Asian Credit landscape
The Asian Investment Grade (IG) market has more than doubled in size over the past decade and we expect that trend to resume as issuance volume returns
Asia remains the fastest growing region, with countries such as Indonesia and India still having a strong domestic story to support strong growth.
Inflation has been less of a problem for Asia when compared to developed economies and Latin America, and easing rates should cushion Asia’s headwinds in growth in 2025.
Asian countries compare favorably against developed markets as a resource rich region moving up the global value chain, with further growth potential coming from a younger demography.
Asian USD Credit
The strategy seeks to deliver attractive and consistent returns by investing in a diversified portfolio of USD-denominated investment-grade bonds issued by Asian governments and corporations. Selective positions in local currencies may also offer additional return opportunities.
Dynamic Rates and Currency
The strategy invests across a broad spectrum of government bonds from both developed and emerging markets, complemented by active positions in interest rates and currencies to enhance return potential.
Asian Total Return
The strategy seeks to deliver superior total returns through a combination of income and capital appreciation, driven by the investment team's high-conviction positions in credit and government bonds, as well as strategic views on interest rates and currencies.
PK Founder Group – steering clear of a default
China-based diversified conglomerate PK Founder Group operates across IT, healthcare and pharmaceuticals, bulk commodities trading, education and training.
PK Founder Group did not have an external rating by international rating agencies, which is quite common among domestic companies in China. When the issuer first came to the international bond market in 2017 unrated, we assigned an ‘investment grade’ rating, with a view that there would be a high probability of support from the Government of China, despite the company’s relatively weak standalone financials. The bond issue was also attractively valued relative to other state-owned Chinese university issuers at the time.
After several interactions with the management, we concluded that the USD bond proceeds were being pledged against the company’s onshore borrowing facilities. This alarmed us as management was not transparent with regards to the structural subordination for offshore investors. The group quickly became a commercialised conglomerate, expanding into non-strategic mandates such as property. In our view, this severely weakened the likelihood of future government support.
The group’s total debt surged by >USD20 billion by end-FY18, (+31% year-on-year increase), and five additional USD bonds (totalling US$1 billion) were issued during the first six months of 2019. Concern were raised after meeting with management, and analysing the latest financials. Positions in our credit portfolios were trimmed and subsequently sold completely. The internal credit rating was subsequently downgraded into the ‘high yield’ category. Following the disposal, the bonds depreciated sharply. In December 2019, the group missed a bond repayment. This ‘default’ resulted in a very sharp deterioration in the value of the bonds.
Source: First Sentier Investors as at 31 August 2020.
Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time
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Nigel Foo
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