Why investors fleeing Chinese real estate are putting their money in India
Investors have sought refuge in niches of the broader Asian credit market from China’s housing debt crisis, citing India as one of the opportunities relatively isolated from the historic turmoil.
Goldman Sachs Group Inc. recently took a positive stance on Asian high yield. Data from Bank of New York Mellon Corp. show that South Korea, Indonesia, Singapore, India, Malaysia and Japan all saw capital inflows into corporate bonds in the three months ended January 18, while China saw outflows.
Rising inflation means there were still losses for broader Asian bonds – as was the case in many parts of credit markets around the world – but they were much more benign. Dollar bills across all Chinese issuer ratings have lost about 3.7% in 2022, even after a rally in recent days for real estate developer securities fueled by political support.
This compares to just 1.5% for Indian borrowers, 0.8% for South Korean firms and 0.7% for Philippine loans, according to a Bloomberg index.
“Investors have hid in Indian investment-grade and high-yield bonds and other parts of Asia outside of China to reduce their exposure to Chinese real estate,” said Wai Mei Leong, portfolio manager at Eastspring Investments.
A recent example of an asset manager that has reduced exposure to Chinese bonds is BDO Capital & Investment Corp., which has sold its holdings in such securities, President Eduardo Francisco said last week.
Both Goldman and CreditSights see Indian companies as attractive. The US bank recommends high-yield renewables, while the latter believes financial firms are best protected from the troubles in the world’s second largest economy.
Still, there are many risks to the broader Asian credit market. Valuations on Asian loans outside of China have already tightened due to demand from investors looking for diversification, according to CreditSights. That means many South and Southeast Asian names only warrant a market performance rating despite good fundamentals, it said.
After beating over the past year and into the first few weeks of 2022, Chinese real estate dollar-denominated bonds have rallied in recent sessions on a raft of policy measures to ease restrictions on the real estate industry and broader monetary stimulus. However, the outlook is highly uncertain as further defaults are expected, according to Goldman.
If the outages don’t get out of hand, it could keep interest in other areas of the Asian market, but any prolonged crisis would cause an economic slowdown that would spread across Asia. Chinese debt accounts for an outsized share of regional indices. Investors might decide to pull out altogether.
Faced with redemption requests, bond fund managers “have to sell a little of everything,” said Jean-Louis Nakamura, Asia-Pacific chief investment officer at Lombard Odier. “I fear that this kind of indirect weakening of the Asian credit market will continue for some time.”
But for now, Asian corporate bonds outside of China offer lower volatility and some country-specific shifts have encouraged investors.
India is lagging behind economies like Brazil and South Africa when it comes to tapping into global financial markets, not least because the country’s central bank has historically been wary of hot money inflows. However, there has been a surge in dollar-denominated issuance in recent weeks, with Reliance Industries raising $4 billion in India’s largest-ever FX bond deal earlier this year.
There has also been a surge in green and sustainability bond sales, making them more in line with trends elsewhere.
“We really like the Indian space because there is a large supply of ESG bonds from these companies and they are not very expensive compared to other Asian peers,” said Paula Chan, senior portfolio manager at Manulife Investment Management (Hong Kong). ltd “The offer from there also offers a pretty good diversification.”
This story was published from a wire agency feed with no changes to the text. Only the headline has been changed.
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