T. Rowe Joins Goldman in Betting on China’s Property Debt
(Bloomberg) -- T. Rowe Price Group is joining Goldman Sachs Asset Management in loading up on bonds issued by beleaguered Chinese property firms.
The investment firm has been boosting its stake in Chinese developers since the start of September, according to Steven Boothe, a portfolio manager for global and U.S. investment-grade bonds at the $1.6 trillion asset manager. Goldman Sachs has said it’s making a similar bet by adding a “modest amount of risk” through high-yield bonds issued by China property developers.
T. Rowe is focusing on debt with investment-grade and BB ratings and is looking to invest in companies that have cash and resources to navigate the period of stress.
“When you have these liquidity issues, you want to be a liquidity provider to the top of the credit quality stack,” Boothe said in an interview this week.
Samy Muaddi, portfolio manager of firm’s emerging markets debt strategy, called the position a “significant trade,” given that T. Rowe manages more than $28 billion in EM credit. It’s targeting a 15% return on its investment, he added.
Junk-rated Chinese debt, which for nearly a decade was one of the most profitable trades in global credit, has been falling for months as Xi Jinping’s government tries to purge the financial excesses from his country’s highly indebted real estate sector. Signs of stability, however, are emerging as the state takes steps to stave off a cash crunch.
“We’re starting to finally see the signs that we might get a policy pivot,” Muaddi said.
China’s junk dollar bonds are yielding less than 20%, down from a high of almost 25%, according to a Bloomberg index that tracks the debt. Even so, most developers face high borrowing costs and may not be able to refinance in time to address December and January maturities.
One exchange-traded fund shows how investors are increasing bets on a rebound in Chinese property junk bonds. Surging inflows have lifted total assets of the iShares USD Asia High Yield Bond Index ETF to $1.86 billion from $383 million at the end of August, an increase of 385%.
T. Rowe is also eyeing dislocation in parts of China’s property supply chain like the cement industry, and in convertible bonds linked to market volatility in Asia, Muaddi said.
In the U.S. high-grade market, the firm is shying away from long-duration corporate bonds that get hit hardest by rising rates, and is seeking opportunities to invest in energy, banks and parts of the technology, media and telecom sectors, according to Boothe.
Boothe and his team have also been finding opportunities in rising stars like Netflix Inc. They also see the potential for issuers like Kraft Heinz Co. to regain high-grade status as their growth improves.
After last year’s downgrade wave, which saw blue-chip companies like Kraft Heinz and Macy’s Inc. fall to junk status, the credit risk component in the U.S. high-grade is “very clean,” he said. For now, investors aren’t getting compensated for liquidity risk and are probably not getting compensated “quite as much” for volatility, he added.
“Right now I would rather take a bit more credit risk, a bit more curve risk, a little less liquidity risk,” Boothe said.
The firm also likes leveraged loans because they capture “a lot of what can work for the next couple of quarters,” including floating rates to protect investors from inflation and some extra compensation for their lack of liquidity, he added.
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