New investor poll shows Asian debt markets are coming of age

HONG KONG - Asian debt markets are becoming deeper and stronger, but are also facing new challenges, according to FinanceAsia’s inaugural biannual Asian Bond Investor Survey, sponsored by HSBC and S&P Global Ratings. Investor interest in the region continues to grow, the survey shows. 

Almost three-quarters of 151 global chief investment officers and heads of fixed income surveyed said they planned to increase their Asian exposure within the next 12 months.

Alexi Chan, Global Co-head of Debt Capital Markets at HSBC, said the findings back up what the bank is seeing as yield-starved investors and companies hungry for capital flock to Asian debt markets.

“Issuance volumes have been growing, supported by an increasingly diversified investor base, including notable demand from insurance companies. We are seeing strong participation by a broad range of investors from across Asia, bringing greater depth and duration to the markets,” he said.

Despite growth in the market, however, investors are cautious about the outlook for credit spreads. A majority of those surveyed said they expected yield spreads on Asian G3 sovereign and high-yield corporate debt to rise above their corresponding risk-free rates in the next 12 months, broadly coinciding with the downbeat views of analysts at S&P Global Ratings.
 “There has been a net bias towards downgrades in Asia-Pacific, indicating rising credit risks,” said Matt Bosrock, Global Head of Developing Markets and Head of Asia-Pacific at S&P Global Ratings. He explained that of 21 sovereigns rated by S&P Global Ratings in the region, China, Hong Kong, Sri Lanka and Papua New Guinea are all on negative outlook.

But investors are taking these risks in their stride, with less than a third expecting a rise in defaults over the next year, the survey shows.

Topping the list of markets on which investors will focus in the next few months is China, with investors set to increase exposure to China's onshore bond market and Panda bonds in particular.  Indeed, 43% of respondents indicated that they were considering entering China’s onshore market, where only a tenth of respondents are currently invested.

Commenting on the opportunities opened up by the lifting of foreign institutional investment quotas in China, HSBC’s Chan said: “A lot of education is now needed to enable international issuers and investors to understand the dynamics of a market that is evolving very quickly."

This process of education ties in with the greater need for independent research.

“Until recently there were no defaults in China’s public bond market. Since the first default in 2014 (Chaori Solar), we’ve seen defaults accelerate,” said S&P Global Ratings’ Bosrock.

“In the first four months of 2016, there have been 10 defaults already, higher than the total number in 2015. It’s therefore not surprising to see stronger demand for quality credit ratings and research in China.”

The survey canvassed the opinions by telephone of 151 leading chief investment officers and heads of fixed income. 74% of the fund managers contacted by telephone are in Asia, with the rest spread over Europe and North America; together they represent well over half a trillion dollars of fixed income assets under management. www.standardandpoors.com www.financeasia.com/bondinvestorsurvey (ATI).