For investors searching for pockets of stronger certainty, the Asian credit market is proving to be more resilient than other markets and asset classes, particularly in the high-yield space.
This comes down to a confluence of factors.
Asian economies, on average, have been more stable than their counterparts in other parts of the world, largely due to the underlying economic robustness, as well as strong and coordinated government policy support.
China remains the key engine of growth in Asia. However, the region is also supported by a number of dynamic, well-run economies throughout North and South-east Asia.
The combination of a well-educated, motivated workforce, sensible economic policy, low external debt and generally decent infrastructure has created a formula of stable economic growth for the region. North Asia, furthermore, enjoys a "first in - first out" position.
Governments across Asia have also been swift and strong in their economic stimulus measures, including interest rate cuts, extra liquidity injections and tax cuts.
For example, Singapore has been especially proactive with fiscal and monetary measures aimed at helping people and companies carry through this storm.
While many investors will be rightly concerned with the potential for default in these turbulent times, Asia corporates should be comparatively more shielded from these vulnerabilities.
First, Asia has a lower exposure to the most badly impacted sectors like oil and gas production.
Second, many large energy companies, such as those in China, are state-owned enterprises and as such, can expect some support from the government.
Finally, a large portion of Asian high-yield bonds are comprised of issues from Chinese property developers, and most of the top 30 issuers have already raised funds to meet their near-term financing needs. The reduced refinancing pressure means the chance of default risk in the market is slimmer.
Thus, Asia credit may be subject to idiosyncratic risk of individual names rather than systemic risk of industries, which is a contrast to the situation in the oil and retail sectors in the United States.
After the substantial adjustment in Asian dollar bonds earlier in the year, Asian high-yield bonds have become more attractive, with the average yields around 7.7 per cent. This creates good investment opportunities in the Asian high-yield bond market.
This is where picking the right bonds can make all the difference.
With lower prices, investors have the opportunity to purchase assets at a significantly lower price. If they are able to avoid the bonds that might default, they will be rewarded with attractive potential returns later when the market recovers.
And the recovery is under way. However, there are pitfalls to look out for. A common issue facing bond markets is liquidity - the ability to buy and sell securities at will without excessive bid offer spreads. Bonds are generally not traded on exchanges and are transacted bilaterally between independent counter-parties.
So when the market has more people intending to sell, with very few investors wanting to buy, it is difficult to match up buyers and sellers to ensure a good two-way flow. This means that valuation prices can get marked down viciously as the clearing price in the market can be much lower than the fundamental value of the security.
STILL NEED TO BE SELECTIVE
Meanwhile, if investors cannot sell their riskiest bonds, they may be forced to sell some of their safer holdings. Therefore, from a credit risk perspective, a strong credit selection process is important to avoid bonds with the highest risks in the market, and to concentrate on bonds with a combination of attractive yields and likelihood of capital preservation.
However, there are ways to create a cushion. During the height of investor concern in March, we increased the exposure to highly liquid US treasury bonds in our managed funds to not only dampen volatility, but also to provide a cushion of liquidity in case we faced mass requests for redemption.
As it turned out, we didn't face significant redemptions and were able to return the funds to more conventional positioning in April.
While there is no doubt that the pandemic has brought with it an era of uncertainty and high volatility, the combination of relatively high yield but lower duration of Asian credit markets, which are also boosted by a historically lower default rate than virtually any other major region, makes the Asian credit markets, and its high-yield segment, in particular, a beacon of light for investors who are looking for a steady ship among the turbulent seas of the current economic climate.
• Patrice Conxicoeur is chief executive and head of South-east Asia at HSBC Global Asset Management (Singapore).