Safe as houses is a saying unlikely to resonate with investors in Asian bond markets. Not only have they seen explosive volumes for the first month of the year, especially in the junk bond market, but this wave of issues has been dominated by Chinese property groups – long one of the riskier sectors in investors’ minds.
Bond markets around the world are beset by commentary worrying about a price bubble as low interest rates almost everywhere, but led by the US, have driven investors on a hunt for yield.
In Asian high-yield markets more than anywhere else, investors face three distinct risks, any one of which could blow a hole in their bond portfolios. Borrowers might default, interest rates could start to rise, or most immediately, liquidity could dry up if another asset class, namely equities, starts to look more attractive.
There are plenty who still see huge risks in the Chinese property sector due to overcapacity. Andy Xie, an independent economist, recently wrote on the Financial Times’ beyondbrics blog of 50 Hong Kongs being under construction on the mainland.
However, other analysts say the market is in much better shape since a crackdown on the supply of credit to the sector in 2011. Christie Ju at Jefferies in Hong Kong says 2012 was a solid year, with residential transactions up 1.5 per cent on the previous year and average selling prices climbing 8 per cent. Analysts at Credit Suisse reckon house prices in the big cities will rise 5 per cent this year, at least.
In the bond markets, Chinese property groups have accounted for six of the 10 biggest deals in a record January that saw $7.8bn of high yield bonds sold – about four times the previous record and more than half the total deals in all of last year. Add in equity raisings and property groups have between them raised more than $6.5bn of fresh funds, according to Ms Ju.
Raja Mukherji, head of credit research Asia at Pimco, says most of the property companies coming to market have decent long-term prospects, adding that urbanisation means there is real demand growth underpinning the sector.
This is in contrast to companies in the steel sector and other basic industries, where overcapacity is a significant problem. Groups from these sectors have not even tried to issue bonds in spite of the appetite for risk that has seen risk premiums, or spreads, shrink to less than 10 per cent – about half of what they were a year ago – and terms and conditions get looser.
The bigger question in the short term is whether the market can cope with the level of issuance it has seen. Some deals have already struggled once they have begun trading as what looked like strong support faded away. Agile, one of the better known Chinese property companies, has seen the price of its bonds slide to 95 cents on the dollar in their first week of trading. Other deals have also had to be delayed or reduced in size.
Mark Follett, JPMorgan head of high-grade debt capital markets Asia, excluding Japan, says this is a good sign. “You would have seen in prior years people pushing the market [in terms of tighter spreads and looser covenants] until something broke and the market closed. This year you have seen some deals trading worse without closing the market. This is a sign of the growing depth and maturity in the Asian market.”
Mr Mukherji disagrees. “You can already see a little bit of fatigue coming into the market,” he says. “This is not so much a sign of maturity, it’s because investors have been taking pain on other deals.”
One of the biggest immediate risks to the market, according to some, is an improvement in economic conditions, which may persuade private bank clients to switch back to equities. Some private banks are beginning to advise such a move now, before others realise the chance for further price gains on top of high coupons has passed.
“The private bank-driven, momentum-driven side of the market is very risky and will hit trouble at some point,” says one experienced debt markets banker.
However, Mark Matthews, head of research in Asia at Julius Baer, is relatively sanguine: “I don’t think you will get capital growth [from high-yield bonds] this year in the same way as last year – but you can still clip a good coupon.”