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AsiAn bond mArkets deepening The inaugural FinanceAsia Bond Investor Survey sponsored by HSBC and S&P Global Ratings reveals the growing scale and confidence of the region’s credit markets and investorsBy Jackie Horne

financeasia.com June 2016 financeasia 41

AsiAn bond investor survey

We live in an increasingly glo-balised world where Asia and, particularly, China play an

ever-growing role. Nonetheless, the in-augural biannual Asian Bond Investor Survey sponsored by HSBC and S&P Global Ratings shows striking regional differences of investor opinion towards a number of issues affecting Asian debt markets.

During March, East & Partners (a FinanceAsia joint venture) conducted a series of telephone interviews with 151 of the world’s top chief investment offic-ers and heads of fixed income. The fixed income assets under management at these funds average out at more than $3.7 billion.

Some 74% of the fund managers con-tacted are based in Asia, reflecting the growing pool of capital being generated in the region and the increased on-the-ground presence of global institutional

investors. Of the remaining, 15% are in the US and Canada and 11% in Europe.

Credit ConsiderAtionsThe most positive message, which showed up time and again in the survey, is a belief in Asia’s importance and in the long-term future of China’s domestic bond market. And over the short-term, an overwhelming 74.8% of respondents said they planned to increase their Asian exposure within the next 12 months.

Only 6% of respondents said they planned to reduce their holdings.

Perhaps unsurprisingly, most of those planning to increase their exposure are based in Asia, while a majority of re-spondents planning to maintain expo-sure at current levels are from elsewhere in the world.

“This ties in with what we see,” Alexi Chan, global co-head of debt capital markets at HSBC, said. “Asia’s debt


capita l markets have been ma king strong progress in recent years.

“Issuance volumes have been growing, supported by an increasingly diversified investor base, including notable demand from insurance companies. We’re seeing strong participation by a broad range of investors from across Asia, bringing greater depth and duration to the mar-kets,” he added.

Despite the expected increase in Asian allocations, investors were not positive about the outlook for regional spreads. Most of those surveyed said they be-lieved that the spreads on Asian G3 sov-ereign and high-yield corporate debt would likely widen over corresponding

impact of usd movements on investment decisions

0

20

40

60

80

100

No, No Impact

Yes, Moderate Impact

Yes, Significant Impact

USD Movements Impact

No impact

Yes, moderate impact

Yes, significant impact

0

20

40

60

80

100%

20.5

35.8

43.7

investment research priorities

Macro-Credit Risks

Industry or Sector Risks

Individual Issuer Risk

Scenario Analysis

Futures/ Forecasting Analyses

Specific Currency Outlooks

Government/ Regulatory Insights

Environmental/Carbon/ Social/Green Research

External Risks

35.851.753.0

97.4

14.6

51.0

46.4

80.8

0 20 40 60 80 100%

10.6

risk free rates over the next 12-months. “Our ratings reflect this finding,” said

Ritesh Maheshwari, head of Asia Pacific market and franchise development at S&P Global Ratings. “We rate 21 sover-eigns in the region and there’s a net bias towards downgrades. China, Hong Kong, Sri Lanka and Papua New Guinea are all on negative outlook.”

Likewise, S&P Global Ratings’ sec-ond quarter Credit Conditions report also highlights elevated negative bias in Asia Pacific, indicating rising credit risks. This is led by metals and mining, where the bias has risen from 11% to 38% from this time last year, followed by property, up from 22% to 24% over

spread movement expectations

Tighten

Stable

Widen

0

20

40

60

80

100%

G3 Sovereign

G3 Investment

Grade Corporate

G3 High Yield Corporate

G3 Financials

the same time frame.Investor sentiment is more split in the

case of Asian G3 financials and invest-ment grade corporates, the Asian Bond Survey showed. Where the former is concer ned, 30.4% of respondents thought spreads would widen, while 43.5% thought they would be stable and 26.1% thought they would tighten.

In the case of G3 investment grade corporates, 33.9% expected spreads to widen, 30.5% to remain stable and 35.6% to tighten.

G3 debt refers to bonds denominated in US dollars, yen, or euros – the curren-cies of the world’s three largest economic blocs, China aside.

15.7

33.7

50.6

35.6

30.5

33.9

4.3

33.3

62.3

26.1

43.5

30.4

investment expectations - next 12 months

Add Exposure74.8%

Maintain Exposure

19.2%

Decrease Exposure

6.0%

67%of investors adding exposure are from Asia



sectors that will contribute most to performance in 2016

Governments

Property Developers

Infrastructure & Utilities

Transport & Logistics

Technology & Telecoms

Financial Institutions, Insurance

0 10 20 30 40 50 60 70 80

Technology and Telecoms

Transport and Logistics

Property Developers

Infrastructure and Utilities

Governments

Financial Institutions, Insurance

58.9

49.7

21.2

57.6

39.7

0 20 40 60 80%

63.6

50%

40

30

20

10

0

Who

le

regi

on China

Japa

nso

uth

kore

aHon

g ko

ngsi

ngap

ore

indi

aAus

tralia

mala

ysia

indo

nesia

expected change in exposure by country - next 12 months

increased exposuredecreased exposure

“We’re seeing strong participation by a broad range of investors from across Asia, bringing greater depth and duration to the markets”–Alexi Chan, HSBC


been absorbing the constant flow of neg-ative news headlines emanating from Europe, as they accounted for 80% of re-spondents concerned about rising politi-cal risk. Those based on the ground in-variably have a better understanding of the nuances and can read through the media’s typically negative bias. This would also explain why Asian investors are slightly more sanguine about the Chinese economy and property market.

Matt Bosrock, global head of develop-ing markets at S&P Global Ratings agrees. “The search for yield means in-vestors are having to turn over more rocks and venture further afield,” he said.

“This is bringing them into contact

Asia Pacific countries expected to see most defaults

0

20

40

60

80

100%

China South Korea

Indonesia India0

20

40

60

80

100

IndiaIndonesiaSouth KoreaChina

in Europe. This worried 55% of respond-ents, followed by volatile equity markets on 41.1% and falling commodity prices 36.4%.

Fears of a China slowdown, on the oth-er hand, did not appear to worry re-spondents as much, attracting a third of the votes.

What do these conf licting answers mean? HSBC’s Chan commented that market participants’ understanding of China sometimes diminishes in propor-tion to their geographical distance and that HSBC sees a particular responsibil-ity to provide global investors with as much insight into China as possible.

Perhaps that same analogy can be ap-plied to Asian respondents who have

Credit ConCerns Respondents to the Asian sentiment survey singled out property as the sector most likely to see defaults. Two-thirds of them expect real estate debt spreads to climb and 85.7% believe defaults gener-ally are likely to emanate from China.

However, those respondents who are worried about the property sector are al-most exclusively located outside of Asia (96.4% of this category). Overall, most respondents feel default rates across Asia will remain stable (68%), with less than a third expecting them to rise (28%).

The key economic concern for the largely Asian investor pool surveyed by East & Partners was rising political risk

expected change in default rates - next 12 months

Decrease signficantly

2.0%Decrease

slightly2.0%

Increase signficantly7.9%

Increase slightly19.9%

Remain stable68.2%

top macro-economic concerns - next 12 months

0 20 40 60%

China: GDP growth below expectations

Commodities: prices continues to fall

Equity markets: continual corrections

with price volatility

Property: correction in several markets

US: faltering economy

Europe: rising political risk

Political and regulatory imposts on industry

Default risks in emerging markets

Reducing yields on offer

32.5

36.4

41.1

15.2

29.1

55.5

51.0

13.2

12.6


74.8%Plan to increase holdings in asia

with markets and opportunities they’re not deeply familiar with. That’s why they need ratings as consistent standards so they can make comparisons across geog-raphies and sectors.”

Both Bosrock and Maheshwari said S&P Global Ratings’ global analysis points to higher risks in other areas rather than rising political risk.

“We have four elevated risk factors,” Maheshwari noted. “The three concern-ing credit market volatility, tightening liquidity, and slowing global growth are all rising. The one risk factor remaining stable is geopolitical risk.”

Credit LoCALisinGThe results revealed that while China

and India are the two countries that in-vestors expect to increase their expo-sure most significantly (43% and 34.4%, respectively), their focus is on G3 cur-rency bonds.

Singapore and Malaysia received the lowest share of votes, with 9.3% voting for the former and 12.6% for the latter.

Only 10.6% of the investors surveyed are currently invested in China’s on-shore market and they are all Chinese. That is not very surprising, but could change in future surveys, given the gov-ernment only scrapped foreign institu-tional quotas in February.

Some 43% said they are considering entering but of this number, 89% are Asian.


“the search for yield means investors are having to turn over more rocks and venture further afield”–Matt Bosrock, S&P Global Ratings


A further half of respondents said they would not be increasing their exposure to panda bonds (onshore renminbi -de-nominated bonds issued by foreign enti-ties) in the next 12 months. In contrast, 23.2% said they had not developed a view as yet.

Where Masala bonds are concerned (offshore rupee-denominated debt), a lack of issuance shows the product has not yet flashed up on the radar screens of many investors. Some 48% of respond-ents said they have still to develop a view.

HSBC’s Chan said the results “support the fact that this is an exciting moment

for the opening up of China’s onshore capital markets. A lot of educational work now needs to be done to enable in-ternational issuers and investors to un-derstand the dynamics of a market, which is evolving very quickly.

“We’re at a point in history where the cross-border flows are only just begin-ning,” he said.

Credit WitH ConsCienCeSome of the most interesting data to emerge from the survey points to a grow-ing awareness and appetite for green bonds and credits with strong environ-

81%Public rating is either important or

very important

Likelihood that esG factors will impact future credit investment decisions

Likely - in the next 12 months15.9%

Likely - in the next

12-24 months23.8%

Likely - beyond

24 months28.5%

Already factored in29.1%

Not likely at all

2.6%

64%of investors already making ESG judgements are from outside of Asia

intentions to increase exposure to panda bonds

no view23.2%

Yes, significantly9.3%

Yes, somewhat17.2%

no50.3%

Corporate social responsibility

regulations

stakeholder expectations

Yield/returns

board/management direction

Un principles

0 10 20 30 40 50 60 70 80 90%

drivers influencing esG decisions

77.7

74.8

68.9

40.8

35.0

2.9

invested10.6%

not invested46.4%

Under consideration43.0%

investment in China’s onshore bond market

93%of investors accessing China’s onshore market are from China


mental, social and governance creden-tials – or ESG.

Only 20% of respondents said they were still unfamiliar with green bonds, while 55% said they were likely or very likely to invest in them over the next 12 months.

In terms of ESG, 29.1% of respondents said ESG is already factored into their credit considerations. Here, investors from outside of Asia led the way, with 64% of these respondents already mak-ing ESG judgement calls.

But Asia does not appear to be very far b e h i nd . A l mo s t 4 0 % of over a l l

respondents said they are likely to start taking ESG into consideration within the next one to two years and a further 28.5% some time after that.

The key reason why they are doing this is because of a sense of social responsi-bility (78% agreed), followed by regula-tions (75%) and stakeholder expecta-tions (69%).

S&P Global Ratings ’ Bosrock said ESG is a growing factor in investors’ de-cision-making processes.

“We’re working towards developing ESG-related products to help investors make more informed decisions,” he said.

invested14.6%

not yet invested65.6%

not familiar with green bonds19.9%

investment in green bonds

no view9.3%Will not

invest20.5%

not likely15.2%

Likelihood to add or increase exposure to green bonds - next 12 months

Highly likely25.8%

Likely29.1%

“ The Europea ns, Austra lia ns a nd Canadians are ahead of the curve in this respect. I recently met a big European pension fund where the ESG head sat right next to the global CIO.”

HSBC’s Chan also flagged an interest-ing juxtaposition between the expected growth of green bond issuance in China and the accessibility of the onshore C h i n a m a r k e t t o i nt e r n a t i on a l investors.

“China is very focused on developing a green bond market to support its envi-ronmental goals and is rapidly becoming a world leader in this area,” he said. “Finding effective ways to connect this supply to international demand will open up major opportunities for green bond investor portfolios globally.”

Credit seCtorsThe survey also highlighted a marked difference in opinion between different regions where sectors were concerned. Asia’s significant infrastructure financ-ing needs and a steady stream of head-lines about China’s Belt and Road policy appear to have hit the mark with region-al investors.

A total of 41.7% of overall respondents said they are likely or highly likely to in-crease their exposure to the infrastruc-ture sector over the coming 12 months. Of this figure, 88.8% hailed from Asia. A lesser 34.5% also said they are likely or highly likely to participate in issues re-lating to China’s grand Belt and Road blueprint.

When it comes to sector performance, 63.6% of respondents think technology and telecom credits will do well, fol-lowed by transport and logistics on 58.9%.

Historically, Taiwanese hardware manufacturers have dominated the Asian technology sector but have not been frequent debt issuers of long-term debt because of the cyclical nature of their cash f lows. However, the growth and popularity of e-commerce giants such as China’s BAT troika (Baidu, Alibaba and Tencent) shows how this has been changing in recent years.

Another strong theme to emerge from the survey is Asia’s ongoing appetite for bank capital instruments. Some 26.5% of survey respondents plan to signifi-cantly increase their exposure and 35.1%



to slightly increase their exposure. A further 24.5% expect to maintain their exposure.

As HSBC’s Chan reflected, “the region has long been a source of demand for var-ious types of global hybrid capital prod-ucts. We are now seeing a growing range of Asian accounts, which can invest in such instruments, even as regulations have tightened.”

“Moreover Asian investors have been the key drivers of bank capital transac-tions, not just from within the region, but at times also from other regions, partic-ularly Europe,” he said.

S&P Global Ratings ’ Maheshwari is a banking sector analyst by background

different credits, investors underlined how important a credit rating is to them. When asked about research that would help them make more informed invest-ment decisions, an overwhelming 97.4% ticked individual issuer risk as well as industry or sector risk (80.8%).

A further 81% said a public rating was either important or very important to them. However, 42% of respondents (mostly from within Asia) also said they planned to increase their holdings of unrated public bonds.

S&P Global Ratings’ Maheshwari and Bosrock believe the answer to this seeming contradiction lies in the histo-ry of low default rates in the region since

decrease significantly6.6%

decrease slightly7.3%

remain the same24.5%

increase slightly35.1%

increase significantly26.5%

expected change in bank capital exposure

“this an exciting moment for the opening up of China’s onshore capital markets ... we’re at a point in history where the cross-border flows are only just beginning”–Alexi Chan, HSBC

Highly likely12.3%

Likely22.2%

not likely3.7%

Will not invest3.7%

no view58.0%

receptiveness to China’s belt and road policy

no view2.0%



maintain exposure34.4%

Will have no exposure

21.9%

expectations of fixed income exposure to infrastructure sector

and said the planned increase did not surprise him at all. “It’s very heartening because bank capital issuance by Asian credits is now expected to increase quite markedly, particularly in the AT1 space,” he said.

Additional tier-1, or AT1 securities, are instruments that contain the ability to defer coupons as well as triggers that provide for a conversion into equity or a write-off, thereby bolstering a bank’s core capital position in times of serious financial duress. The instruments allow banks to optimise their capital structure under the Basel 3 banking regulatory framework.

In order to differentiate between

88%of investors highly likely, or likely to increase exposure are from Asia


the Asian Financial crisis. However, they note this is about to change.

“Until recently there were no defaults in China’s public bond market, ” Bosrock said. “Since the first default in 2014 (Chaori Solar), we’ve seen defaults accelerate.

“In the first four months of 2016, there have been 10 defaults already, higher than the total number in 2015,” he add-ed. “It’s therefore not surprising to see stronger demand for quality credit rat-ings and research in China.”

While the survey shows that inves-tors can often have a markedly different view of the world depending on where they are based, their desire for wider and deeper knowledge appears to be a given.

“Historically trade and capital flows have been north-south, usually between developed and developing markets,” S&P’s Bosrock concluded. “But in the last decade, we’ve seen this transition-ing to south-south. I was recently in Brazil and the number of questions I fielded about China was immense.” FA

survey metHodoLody

Hong Kong 32

Singapore 29

China 24

Australia 7

Japan 7

South Korea 7

Malaysia 6

USA/Canada 23

Europe/UK 16

TOTAL 151

Between March 7th and March 29th 2016, east & Partners Asia conducted a series of telephone interviews with 151 of the world’s top chief investment officers and heads of fixed income from Asia, europe and north America. A breakdown of the geographical split of the interviewees and their job titles is highlighted below. The fixed income assets under management at these funds average out at more than $3.7 billion.

Head of fixed income 54

CIO of fixed income 52

Head of credit 22

Senior FI portfolio head 19

Head of emerging market debt 4

TOTAL 151

survey resPondents by job desCriPtion

important32.5%

Very important48.3%

not important7.3%

somewhat important11.9%

importance of public credit rating for bond issues Change in exposure to public unrated bonds - next 12 months

no view 1.3%

Will not change37.7%

reduce significantly

10.6%

reduce slightly7.9%




For more on the survey, with insights and analysis on Asia’s bond markets, please visit our micosite at www.financeasia.com/bondinvestorsurvey

asian bond markets deepening - hsbcfinanceasia.com june 2016 financeasia 41 asian bond investor...

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