Hedge Fund Triada Says Now Is Best Time to Buy Asian Credit
(Bloomberg) -- For Triada Capital Ltd., a Hong Kong-based hedge fund focusing on pan-Asian corporate credit, 2019 offers abundant buying opportunities following the region’s worst bond sell-off in a decade this year.
“There’s a wealth of opportunities for good trades next year,” said Monica Hsiao, the former CQS Management Ltd. portfolio manager who started the Triada Asia Credit Opportunities Fund in 2015. Her team is currently refreshing work on credits with the view to increase high-yield bond exposure in their portfolio, she said.
Hsiao, who has a decade of experience with Asian fixed income, says Asia is entering a relatively benign credit environment as the U.S. Federal Reserve could slow its pace of rate hikes next year and China is likely to continue with policy easing. There are no signs of runaway inflation yet and U.S.-China trade discussions could make progress, hence it’s the best time to get into Asian corporate bonds as “a lot of the individual credits are priced at such cheap valuations,” said Hsiao.
The fund is up 3.4 percent this year as of Dec. 12 on net return basis, compared with a 1.6 percent loss for the overall Asian dollar bonds over the period. To avoid “landmines and finding the winners in this aftermath of a broad shake-up,” fundamentals will be a key focus in 2019, she said.
Here’s what Hsiao said in an interview in Hong Kong this week.
Where are the opportunities ahead?
We believe Asian high-yield dollar bonds are much more attractive right now than high-grade. Investment-grade bond valuation is not as cheap compared with the U.S. high-grade after the latter has repriced wider recently.
Within dollar junk bonds, China property sector in general is very cheap as there were twice as many positive ratings actions compared to negative actions, even as bonds were selling off dramatically this year, and we also see opportunities across selective Chinese industrials names and some Indonesia corporates.
How do you see trading liquidity?
There’s a bit more uncertainty about dealers’ willingness to provide trading liquidity compared with previous starts of the year.
Next year dealers may continue to be cautious in using their balance sheets to take inventory and make markets, because most may carry over memories of feeling battered from their experience this year and may continue to worry about whether they can quickly offload bonds. Dealers mostly still expect the first quarter will remain similarly difficult for trading.
What will be the key risks?
We are always looking out for signs of outflows and unwinding of credit structured products that may occur due to Chinese institutional money going back onshore or because of rising financing costs. The market has been jittery about the risk of supply repricing existing bonds, though recently NDRC may be giving more flexibility to high yield companies to issue onshore, and this may reduce incentives for issuers to issue as much dollar bonds offshore.
On the fundamental side, we are still cautious about risks of any policy missteps in China and we expect some more easing measures. But it’s about when and how much. We are watching the broader EM macro environment for any unexpected reflationary risks or geopolitical uncertainties, which could then hurt Asian credit.
How will trade war impact the market?
The interim market volatility due to the trade war will continue and it will still be a theme for next year, but the fundamental risks are largely priced in already. There may be a higher likelihood of risk demand skewed more to the upside than downside in the first quarter as there’s already lighter positioning by dealers and a consensus to the bearish tone over the last couple months.
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