Asian high yield bonds are a much safer investment than their returns suggest, says 7IM
Investors should not ignore Asian high yield bonds as they are much safer investments than their generous returns suggest, says Haig Bathgate of Seven Investment Management (7IM).
At present, the interest paid on Asian high yield corporate bonds is much higher than other emerging or developed market bonds.
Typically, the higher the interest rate paid by a company, the more likely it is to default and swallow up investors’ money in the process.
However, Bathgate, Head of Portfolio Management at 7IM, believes Asian corporate debt is actually a much safer bet at present than many other countries, including the US.
He says: “When you invest in credit, you are lending money to companies that pay you interest. The higher the chance the company will default, the more interest you earn.
“But while the interest being paid by Asian high yield companies is generous, we believe they are far less likely to default than their high yields suggest.”
He adds: “One reason we like this asset class is that China is a large component of the [Asian] index. China has handled the global pandemic very well and should recover more quickly, making its companies less likely to default.
“By contrast, we do worry about the US high yield sector, since many of its companies might be vulnerable if Covid-19 continues rampaging through the south and west.”
Bathgate also believes the Chinese government has shown great willingness to help its firms weather the coronavirus crisis.
He adds: “The Chinese government is more likely to support struggling companies than those in the US or Europe, which also helps explain why its historical default rate on high yield has been so low.
“After weeks of research, we believe there is currently a strong case for investing in Asian high yield bonds.
7IM currently recommends the UBS Asian High Yield Fund, which has returned 1.2 per cent over the past three years.
Bathgate likes the fund because he believes it will deliver “robust returns” over the long term.
Other Asian high yield funds he likes include PIMCO GIS Asia High Yield and Allianz Dynamic Asian High Yield.