HSBC Private Banking Says Asia Junk Bonds May Return 14% This Year

(Bloomberg) -- HSBC Private Banking has joined a growing number of funds that are bullish on Asia’s junk bonds and expect further gains after a strong rally in the first quarter.

U.S. currency junk notes in the region have gained 5.6 percent so far this year, in the strongest start since 2012, according to ICE BofAML data. The private wealth arm of HSBC Holdings Plc sees more scope for gains, fueled by Chinese developers that are making progress cutting debt. "Stealth easing" of Chinese property curbs has also raised hopes of a boost ahead, even as new home price growth abated for a fourth straight month.

HSBC Private Banking predicts that Asian dollar junk debt could return 14 percent in 2019 after losses last year, while Asia investment-grade bonds may return 7 percent, according to Jeffrey Yap, Hong Kong-based regional head of fixed income, currencies and commodities, Asia.

The bank has seen rising demand for bonds from super-rich clients, according to Yap. HSBC is building an ultra-high-net-worth team in Asia, and plans to hire for the new business. The wealth of the 137 people in the Asia Pacific region on the Bloomberg Billionaires Index has jumped by $135 billion this year.

The firm is positive on Chinese property U.S. currency junk notes, which make up a high proportion of the region’s speculative-grade debt, as deleveraging efforts by developers have been “on track,” and their sales have been strong, said Yap, whose firm manages $309 billion in assets globally.

Average yields on Asia’s junk dollar notes have fallen about 2 percentage points so far this year to 6.9 percent, but they are still above the low of 5.9 percent in the past 12 months, according to a Bloomberg Barclays index.

Among the key calls by HSBC Private Bank’s Yap:

• Underweight non-bank financials, including leasing companies and Chinese asset management firms, as they have a higher risk profile and the role they play as a conduit for credit is “diminished,” given the development of capital markets
• Underweight on India dollar bonds due to valuations
• Within investment grade, likes energy sectors globally
• Expects slightly weaker U.S. dollar going forward, says pockets of local currency markets are attractive, such as offshore yuan

To contact the reporter on this story: Denise Wee in Hong Kong at dwee10@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum

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