In a detailed analysis of Asia’s high-yield landscape, PineBridge Investments identifies four prominent trends for generating alpha in the market which includes beneficiaries of the consumption-led recovery in China and across Asia; beneficiaries of the decarbonization trend; the small number of robust Chinese property developers with large investment property portfolios; and credits with a strong liquidity backdrop.
As the first theme, PineBridge focuses on beneficiaries of Asia’s consumption-led recovery. It is interesting to note that the asset manager isn’t too upbeat about China’s role in this rebound. However, it expects growth to accelerate from 2022 and meet the government’s target of 5% for 2023. As per the asset manager, this means a conducive macro backdrop for credits. PineBridge further emphasises that the reopening of China will boost investor sentiment and says they can capitalise on this theme not just for China, but other Asian regions too.
PineBridge considers India as one of the biggest beneficiaries of the decarbonisation trend. India’s national environmental targets include growing overall capacity from around 170 GW to 500 GW by 2030, primarily led by solar power (450 GW) followed by wind power. The asset manager expects this to remain a mainstay of the Asian USD HY market for years. However, there are also some hurdles. PineBridge considers delayed payments to generation companies from state distribution offtakes as the biggest challenge. The Late Payment Surcharge (LPS) scheme which incentivises state distribution companies to clear these overdue balances, has boosted cash flow for the renewable companies, though. Expressing its optimism, PineBridge states that the ESG positioning, coupled with government and regulatory support would propel India on the growth trajectory.
Talking about the property market, PineBridge observes some signs of early recovery in 2023, but a subdued sales momentum particularly in lower-tier cities. However, the asset manager expects an L-shaped trajectory for property sales. “We are not constructive on the distressed space and expect a prolonged restructuring process for most default cases. That said, we expect a (very) small number of higher-quality companies to survive this downturn. Those companies with larger investment property portfolios and better-quality land banks in top-tier cities will be more resilient.” stated PineBridge.
According to PineBridge, there have been multiple cases of tenders, buybacks, or early calls by issuers with strong liquidity positions. This has been possible due to cheaper alternative funding or strong operating cash flow generation. The asset manager expects this theme to continue and remain a source of alpha opportunities in Asia’s high yield market. PineBridge further states that Asian corporates have lesser pressure of higher funding costs due to lesser monetary tightening in the region. As for cash flow generation, commodities companies have accumulated large cash buffers from periods of elevated commodity prices, as per the asset manager.
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