The sell off in early February, post the High Yield bond issuance frenzy in Asia Pacific proved to be a good time to pick up High Yield bonds in Industrials space. New issuance stalled in February after the Chinese New Year Holidays. Asia ex-Japan Corporate HY debt issuance was just USD1.4 bn compared to USD8.4 bn of issuance seen in January 2013. With low new supply and improved economic outlook, there was significant pullback in yields in the past month, as the fund management firms have had the time to digest the new supply.
Since 8-Feb 2013, yield on BOAML Asia Non-Financial High Yield Index has tightened by 56bps from 7.38% to 6.82% as of 6-Mar-2013. We expect yield compression to continue during the year, albeit at a slower pace, backed by improvements in financial performance of the underlying companies, Chinese government focus on infrastructure spending, improving economic environment across Asia-Pacific and low default rates. Factors that pose risks are sudden increase in US Treasury rates and large new supply of High Yield bonds in Asia as appetite for these bonds still remain limited compared to the US and Europe.
Official Manufacturing Purchasing Managers' Index (PMI) for China fell to 50.1 for February 2013 compared to 50.4 in January and the HSBC Manufacturing PMI for China fell to 50.4 in February compared to 52.3 previous month. HSBC Services PMI Index for China was down to 52.1 as compared to 54.0 in January 2013. This data suggests that even though China will witness an economic recovery in 2013, the pace will remain slow. A strong growth in exports, however, came as a positive surprise with 21.8% yoy growth in exports in February. Market expected a trade deficit of USD6.9 bn for February but the realized number for February 2013 was USD15.25 bn.
Chinese government appears to be planning for a more steady growth with its GDP growth target of 7.5% and targeted inflation of 3.5%. The government this time around is refraining from big bang plans to boost growth rates. The State Council, China's cabinet, issued a series of measures to control speculation in real estate sector. Among the measures are capital gain tax of 20% on home sales as well as increase in down payment ratio and increase in mortgage rates for second home buyers. A steady housing market is positive for long term as wide volatility in housing prices may hamper the investor sentiment towards the sector. We believe the housing sector will continue to a steady growth during 2013.
We feel the portfolio manager and the wealth managers will continue to pour into the High Yield markets in Asia-Pacific during 2013 to capture the higher yields. Even though there is opportunity to add higher yielding names to improve portfolio performance, it is imperative that a through credit research analysis and understand all the risk associated with those names and stay clear of the names which have a unfavourable risk reward ratio.