Offshore renminbi bonds offer value: Cecilia Chan interview

Another area investors need to be selective on is the Asian high yield market, particularly as the biggest issuer base is Chinese property developers.

It is an area where investors have to be extremely careful: you can’t just take exposure in any bond by a Chinese property company, because there is a lot of tightening pressure on the sector. There are some smaller property companies where we are not sure about the sustainability of their business models. You can’t just look at the high yields on those issues. That is why, generally, we focus on the larger, more established property companies.

Outside CNH bonds, where else do you see opportunities?

Overall, we are optimistic on Asian currencies based on the strong fundamentals in many countries in the region. In general terms, we see the region’s currencies as being undervalued compared with other currencies. On a strategic basis, we like the renminbi, and the Indian rupee because of the higher yield. We also look at currencies from a tactical perspective, taking the opportunity to add value as a result of short-term volatility. On a tactical level, we are interested in the Singapore dollar, the Malaysian ringgit, Korean won, Indonesian rupiah and Philippine peso. We are less interested in Thai baht and Taiwan dollar.

In terms of the duration risk of the portfolio, generally we tend to be underweight duration. If you look at the long-term historical average for 10-year US Treasuries, they should be in the four to four-and-a-half percent range. When Treasuries are below four percent, we think that the market is still expensive. That is the situation with the Treasury curve at the moment [as of May 5, 10-year Treasuries were trading around 3.31%]. When we look at the relative value of investment grade compared with high yield, currently we prefer high yield because, on a selective basis, we are better paid for the risk. We are underweight investment grade, particularly sovereign investment grade.

That being said, we are overweight investment grade banks: we like banks generally and are also overweight non-investment grade financials. On crossover/high yield credit we are selective. By ratings, we are overweight the triple-B and the single-B sector, and also some unrated bonds, and are neutral rather than strictly underweight in the other ratings categories.

In the unrated sector, do you focus on the companies that would be able to get a rating if they chose to?

Generally, yes. A lot of the unrated companies that come to market are so popular and feel that because investors are familiar with them and they are not frequent issuers, they can do deals without a rating. But when it comes to our investment process, our credit analysts will still assign an internal rating to those credits.

After the Asian financial crisis highlighted the risks of companies funding themselves mainly in the offshore markets, the development of onshore capital markets became a focus for authorities. As an investor, are you satisfied with the progress of the local currency markets?

In terms of maturity and user-friendliness, the Hong Kong dollar market, the Singapore market, and also the Malaysian market all offer good access to investors. There has also been progress in Korea, Indonesia, Philippines and Thailand, but investors are subject to withholding tax in those markets. Then you have China and India where foreign investors need a special licence to invest in their domestic markets.

It is true that these impediments affect how keen we are on individual markets. Having said that, Asian local currency bond markets have increased in popularity among investors, largely because of the potential appreciation of the currencies, and also due to the improvement in liquidity, particularly in markets like Korea, Philippines and Indonesia.

Indonesia is very popular, especially for foreign investors. And there have been other periods in the past when it has been attractive due to the high yields and potential currency appreciation.