High-yield bond investors may view the prospect with mixed feelings, given the Asia high-yield market’s poor performance after Chinese real estate companies began defaulting on their debt in 2021. But the market has made a remarkable recovery, outperforming its counterparts with a year-to-date (through May 31) return of 9.1% compared with 1.6% for the US high-yield market, 3.2% for European high-yield, and 2.8% for the global high-yield market.
But returns tell only part of the story. The Asia high-yield market has changed structurally, offering investors a much-improved risk-reward profile. To understand these changes and what they mean, it helps to know a little about the market’s recent history.
China’s Presence in the Index Has Shrunk
Until a few years ago, investors seeking exposure to high-yielding debt issued by Chinese companies saw the Asia high-yield market as a logical inclusion in their portfolios. At one stage, Chinese companies accounted for as much as 45% of the noninvestment-grade corporate component of the JP Morgan Asia Credit Index (JACI HY). Most of these (35%) were real estate companies.
That all changed in 2021, when China Evergrande Group, one of the country’s biggest property developers, began a series of debt defaults, triggering an industry-wide crisis. The level of Chinese government support for the industry fell short of investors’ expectations, and the attraction of the market evaporated—as did much of the country’s presence in the index. Mainly because of property-company defaults and liquidations, China’s share of the JACI HY fell from 38% in 2021 to 25% by March 2024, while its share of the index’s real estate sector fell from 23% to slightly more than 7%.
Today, the market has a more even balance of countries and sectors. China still dominates, but much less than it used to, and other countries—notably India, Pakistan, Thailand and the special administrative regions of Hong Kong and Macau—now account for more of the index. Among sectors, financials have displaced real estate as the index’s biggest component, and sovereigns, consumer and utilities have increased their shares too (Display).