Asian high-yield bonds should prove a safe haven for 2003, says ING

Healthy economic growth in Asia and continued demand for Asian bonds from Asian investors – known as the ‘Asian bid’ – should immunise Asia’s high-yield bond market next year from the default problems plaguing the global corporate bond market in 2003, according to research by ING Financial Markets.

As a result, Asian credit default swap spreads are likely to remain tight, the bank said. “The cost of hedging will be lower with credit spreads [tightening] in cash bonds,” said Hong Kong-based Damian Wood, ING’s head of credit research for Asia. ING believes the positive outlook should cause Asian bond spreads to tighten by 40 basis points on average during the next twelve months.

“With regards to overall portfolio, I don’t think there will be a drastic change. There’s no need for change given our view of a positive outlook given the fundamentals of the market,” said Wood. But there could be some pressure on credit default swaps as a result of underwriters hedging positions prior to deals.

Overall, ING believes Asian US dollar-denominated bonds could prove a welcome shelter from an otherwise volatile global market in 2003, offering potential returns of up to 30% during the next 12 months. ING believes Asian economic growth, excluding Japan, will hit 5.7% next year, with forecasts of 2.3% for Hong Kong, 7.5% for China and 5.5% for Korea. Expanding economies and low interest rates should provide a favourable backdrop for a continued strengthening of credit profiles in 2003, said the bank.

ING predicts only a moderate $20 billion of new high-yield bond issuance in 2003, with $5 billion worth of bonds maturing. This would contribute a net 18% increase in supply. The Dutch bank added that there is an abundance of liquidity in the region, estimating that surplus cash in the banking system in Asia ex-Japan is $900 billion. This dwarfs the Asian US dollar bond market, which is worth only $90 billion. The report claims just a fraction of the surplus deposits could either be used by banks or withdrawn by depositors and invested in the Asian US-dollar bond market to accommodate the potential surplus.

ING expects medium- to long-dated corporate bonds from companies such as Hong Kong-based PCCW-HKT and Hutchison Whampoa, Quezon Power of the Philippines, and selected bonds issued by Philippine Long Distance Telephone to be among the best performing Asian US dollar-denominated bonds over the next 12 months.

Bonds issued by Asian telecommunication companies are also expected to experience strong performance in 2003, and ING has put among its top recommendations short-dated Malaysian and Korean telecom bonds. Among the banks, Japan’s UFJ bonds due in 2011 should offer returns of up to 20%.