Asia high yield sectors continued to perform well
The core sectors within Asia high yield that range from financials, commodities, infrastructure, renewables, and gaming, continue to perform positively from a credit perspective.
Taking Macau gaming as an example, February ‘s casino gaming revenue in Macau was up by 7.8% year-on-year in February and up by 8.2% month-on-month.2This is a conducive backdrop for HY credit investors as free cashflow generation on the back of profit recovery can help to drive deleveraging for Macau gaming bond issuers and provide potential rating upside.
Similarly, we continue to find evidence for strong capital ratios in Asian banks and see broadly stable asset quality trends. We believe that going down the capital structure in well capitalized and profitable Asian banks is the appropriate strategy to harvest risk premia and income.
Focus on volatility-adjusted income is part of portfolio construction, coupons matter
We believe in building a well-diversified portfolio that encompasses various sectors and regions with income per unit of risk as a key metric. This also means focusing on higher coupon bonds that continue to deliver a steady stream of cashflows to investors, not just focusing on yield metrics such as yield to worst or yield to maturity.
Within the Asia high yield space, we continue to see a healthy average coupon level of over 5.5% at index level even as the yield of the index has come down. This plays a role to cushion the portfolio during periods of economic and trade policy uncertainty. Lastly, during an environment of rates volatility, we see a strong case for shorter-dated high yield paper that allows investors to lock in high levels of yields among HY issuers that have strong market financing assets. For reference, the Asia HY index average duration is only at 2.6 years, which reduces its correlation with the daily movement of US treasuries.3
