At first glance, Asian credit is in robust health. The volume of US dollar bond issuance from Asia excluding Japan was up 20 per cent year-on-year at the end of May, reaching USD156 billion. Green bond issuance has exploded, already doubling last year’s total.
These positives conceal a more complex picture, though. Developments in China loom over Asian credit: credit spreads for US dollar bonds issued by Chinese real estate developers – which account for about half of all corporate US dollar high yield bonds from Asia excluding Japan – have widened since the government introduced its ‘three red lines’ deleveraging policy last August.
At the macro level, many fixed income investors remain concerned about inflation and the prospect of rising interest rates, although HSBC is not looking for the US Federal Reserve to move soon and expects US Treasury yields to remain “lower for longer” – with the 10-year yield actually declining from around 1.5 per cent today to 1 per cent by the end of the year.
A new world
Asian credit will continue to perform in this new world, though, said Dilip Shahani, Head of Global Research, Asia-Pacific, at HSBC. “Lots is already in the price and there will be differentiation between the good, the bad and the ugly, but spreads will slowly tighten for a range of fundamental and technical reasons.”
Shahani said HSBC had a positive outlook for Asian credit in the second half of 2021, especially for high yield, which is dominated by Chinese real estate developers. These are one of HSBC’s preferred credit sectors for this year, along with sovereigns, conglomerates, gaming and renewables.
As government deleveraging efforts take effect, investing in Chinese real estate bonds would require balancing potential returns with careful management of the risks, said Keith Chan, Head of Corporate Credit Research, Asia-Pacific, HSBC. Stronger names would benefit a longer-term approach with the focus on greater durations, while a short-term view is more appropriate for weaker credits. The Chinese real estate high yield market has been around for 16 years and has had five major corrections, Chan pointed out. “Every correction has offered buying opportunities.”
Growth from other Asian markets has helped make up for relatively slower issuance from mainland China, with US dollar bond issuance from mainland issuers at its lowest relative level since 2014.1
Despite India’s devastating second wave of COVID-19, its bond markets have continued to function this year, with some sectors and structures displaying more resilience than during the first wave, said experts taking part in a panel moderated by Chetan Joshi, Head of Debt Financing Business, India, at HSBC. Investors seeking diversification are turning to Indian high yield, they said, and bond buyers also like the strong structures and predictable cash flows that characterise renewable energy issuance from the country.
In fact, the rapid growth of green, social and sustainability (GSS) issuance is changing the composition of the Asian credit market – and its likely growth trajectory. Bond sales have been led by sovereigns, banks and renewable energy firms, and GSS bonds have outperformed so far in 2021 as broader markets have stalled.
“The supply opportunity will still come from renewables and the carbon reduction trend, although we see companies from more sectors – including technology – coming to the market.” said Louisa Lam, Director, Asia Credit Research, Asia-Pacific, HSBC.
Lam added that China was accelerating the development of its onshore green bond market to meet its ambitious decarbonisation goals, but said she expected Chinese offshore green bond issuance to increase while differences remain between offshore and onshore green bond standards. “We believe investors will still focus on offshore US dollar bonds as a proxy for onshore investment.”
Disclosure and disclaimerMore, collapsed
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Keith Chan, Dilip Shahani, Louisa Lam, CFA,
Fixed income: Basis for financial analysis
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its fixed income research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies in corporate credit and based on country-specific ideas or themes that may affect the performance of these bonds in the case of covered bonds, in both cases on a six-month time horizon; 2) to identify trade ideas on a time horizon of up to four months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which, in the case of credit research, may differ from our long-term opinion on an issuer. Buy or Sell refer to a trade call to buy or sell that given instrument; HSBC has assigned a fundamental recommendation structure, as described below, only for its longer-term investment opportunities.
HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.
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Definitions for fundamental credit and covered bond recommendations
Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve within the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.
Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable for up to six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.
Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate within the next six months. For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.
Definitions for trades (Rates & Credit)
Buy and Sell refer to a trade call to buy or sell a bond, option on an interest rate swap ("swaption"), interest rate cap or floor, inflation cap or floor, or Total Return Swap ("TRS"). The buyer/seller of a TRS receives/pays the total return of the underlying instrument or index at the end of the period and pays/receives the funding leg.
Buy protection and Sell protection refer to a credit default swap (CDS): the protection buyer/seller is effectively selling/buying the reference entity's credit risk.
Pay and receive refer to a trade call to pay or receive the fixed leg of an interest rate swap (IRS), a non-deliverable IRS, the first-named leg of a basis swap, the realised inflation leg of an inflation swap, or a forward rate agreement (FRA). An investor that executes a pay or receive trade is said to be "paid" or "received."
Payer and receiver refer to inflation caps or floors and to swaptions: a payer is an option giving the right but not the obligation to enter a paid position in an interest rate or inflation swap, and a receiver is an option giving the right but not the obligation to enter a received position in an interest rate or inflation swap.
ASW (also asset-swap, Buy on asset swap, Buy on an asset-swapped basis): Buy a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
RASW (also reverse asset-swap, Sell on asset swap, Sell on an asset swapped basis): Sell a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
Distribution of fundamental credit and covered bond recommendations
As of 12 July 2021, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
|All Covered issuers||Issuers to whom HSBC has provided Investment Banking in the past 12 months|
For the purposes of the distribution above the following mapping structure is used: Overweight = Buy, Neutral = Hold and Underweight = Sell. For rating definitions under both models, please see "Definitions for fundamental credit and covered bond recommendations" above.
Distribution of trades
As of 30 June 2021, the distribution of all trades published by HSBC is as follows:
|All Covered instruments||Issuers to whom HSBC has provided Investment Banking in the past 12 months|
For the purposes of the distribution above the following mapping structure is used: Buy/Sell protection/Receive/Buy Receiver/Sell Payer = Buy; and Sell/Buy protection/Pay/Buy Payer/Sell Receiver = Sell. ASW is counted as a buy of the bond and a paid swap, and RASW as a sell of the bond and a received swap. For rating definitions under both models, please see "Definitions for trades (Rates and Credit)" above.
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