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what it means for Asia junk bond investors

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Moody’s estimates that real estate and related industries make up more than a quarter of China’s economy.

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Chinese real estate bonds were once a major performance driver for Asian junk bond funds, but the national real estate debt crisis has reduced the market share of real estate bonds.

As a result, Asian high-yield bond investors need to prepare for lower returns, investment analysts told CNBC.

According to portfolio managers and analysts who spoke to CNBC, the debt crisis has pushed down the prices of real estate bonds, so some Asian high-yield funds have an average market capitalization of over 35% to about 15%. It dropped to%.

Real estate bonds traditionally form the majority of Asian high yield bonds. However, as market value declined, so did the overall share of the Asian junk bond market. As a result, fund managers turn to other types of bonds to make up for those losses, and investors in these high-yield funds may not be able to find the same type of returns again.

High-yield bonds, also known as junk bonds, are non-investment grade bonds with high default risk, so interest rates are high to compensate for these risks.

“China’s real estate share has fallen sharply,” said Carol Lai, investment manager Brandy Wine Global’s Associate Portfolio Manager. “”With China’s real estate bond supply declining by nearly 50% year-on-year, the market remains fairly broken and only carefully selected high-quality developers can refinance. “

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According to financial research firm Morning Star, this decline was primarily due to lower bond supply and the removal of default bonds from the index.

“As a result, the importance of real estate in China [the] The credit world in Asia is shrinking. ” Morningstar research analyst Patrick Ge said.

Last December, China’s Evergrande Group, the world’s most debt-ridden real estate developer, defaulted. Fallout from that crisis has spread to other companies in China’s real estate sector. Other developers showed signs of tension – A few While they missed interest payments, others were completely in default.

Fund managers are shifting their focus to other areas to fill the gap left by Chinese real estate, but analysts say these alternatives are unlikely to offer better yields than their predecessors. Says.

“Transition to other sectors and countries [away from the very high yielding China property space] Certainly reduces the relative yield [to the index] It’s in the portfolio. “

“But managers need to think about what yields they can actually achieve with losses from default,” she told CNBC.

Due to the declining supply from China, interest in Indonesian high yield bonds has increased since the Chinese real estate crisis.

Carol lye

Brandywine Global Associate Portfolio Manager

In the past, funds with high weights in Chinese real estate bonds outnumbered funds with low weights in Chinese real estate bonds, according to Ge, but now they aren’t.

“Given the liquidity struggle and reputational decline in the sector, at least in the short term, this is unlikely to be the case in the future,” he said.

China’s large real estate sector has been under pressure over the past year as Beijing curbed developers’ high reliance on debt and rising home prices.

Fill the gap

As Asian high-yield bond fund managers move funds from Chinese assets, areas where they are diversifying include India’s renewable energy and metals sectors, according to Morning Star.

Some have seen potential upturns in Indonesian real estate. We expect this to benefit from low mortgage rates and an extension of government stimulus to help Covid recover.

“Because of the declining supply from China, interest in Indonesia’s high-yield bonds has increased since the Chinese real estate crisis,” said Rye of Brandy Wine Global. “”Indonesia is benefiting from commodities and is relatively stable due to housing demand and inflation not being uncontrollably stable. “

According to a recent Moody’s report, Southeast Asia’s Asian high-yield portfolio may be less risky to investors due to its “relatively stable” credit quality and low default risk.

“Portfolio managers need to rely more on bottom-up credit selection capabilities than in the past to select winners / survivors in this sector,” Morningstar Ge told CNBC. Bottom-up investment is an approach that focuses on the analysis of individual stocks rather than macroeconomic factors.

Lai said entering other sectors is a “healthy” development because it helps diversify the investor’s portfolio, but warned that there are still other risks involved.

The future path of developers

China’s real estate debt crisis has since plunged investors’ confidence in the ability of developers to repay their debt. They downgraded their ratings one after another.

According to a June report, rating agency Moody’s reports that real estate companies are also facing challenges in attracting foreign funding, which will keep liquidity and the risk of refinancing high.

“The US dollar bond market is still mostly closed in Asia [high yield] Annalisa Dichiara, Senior Vice President of Moody’s, said:

Moody’s expects more Chinese real estate developers to default this year. Half of the 50 names covered by the agency are under consideration for downgrades or have a negative outlook.

The data released in early June China’s real estate market is still sluggish.

According to the National Bureau of Statistics of China, real estate investment in the first five months of the year was down 4% year-on-year, despite an overall increase in fixed asset investment.

According to an analysis of official Goldman Sachs data, real estate prices in 70 cities in China rose 0.1% in May from a year ago.

— CNBC’s Evelyn Cheng contributed to this report.

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