Coronavirus Impact on Asian Bond Market
Offshore HY Property:
Considering the scale of Wuhan coronavirus outbreak, we see an imminent impact on developers’ 1Q20 sales and believe it could lead to a softer 2020 contracted sales guidance from the previous growth rate expectation of 10-30%. That said, Jan and Feb are normally slack season on property sales, and we expect developers are ready to postpone project launches to facilitate. While there will be negative impacts in near term, we believe such impacts to be transitory and pent-up demand could be released rapidly once the epidemic is contained.
In regards to the geographic distribution of landbanks, across the developers which we monitor in the USD bond space, most developers have a diversified landbank, and Hubei province (including Wuhan city) typically accounts for a single-digit percentage points of landbank in GFA. Therefore, we do not foresee a big shortfall in developers’ 2020 saleable resources to support a mild growth in contracted sales for the year.
On liquidity side, with an expectation of slower sales in 1Q and uncertain market outlook, we expect developers to remain financially prudent to preserve liquidity, as such land purchases and construction starts will soften. Besides, we expect potential easing on policy stance as well as financing towards developers, which will be positive in the mid-term. According to S&P, rated developers have issued US$74bn worth of offshore bonds in 2019. In addition, there are over US$17bn (IG:1.5bn; HY:15.9bn) worth of bonds issued since the beginning of 2020, which already covers majority of the refinancing needs for 2020 at a total of c. US$23bn.
All in all, we believe the Coronavirus outbreak will only delay rather than destroy housing demand, and the impact on credit metrics is to be manageable unless the duration of the virus outbreak is longer than expected.
Offshore other HY:
Travel and consumer related sectors are the most affected by coronavirus and the impact may last another 2-3 months in our view. However, these sectors have relatively less bonds outstanding. The main components of the offshore other HY market are energy, commodity, utility and LGFVs, which are less affected by the epidemics, although some interruption in operations will be seen with the prolonged Chinese New Year holiday. We expect more stimulus for fixed investment from the central government this year to make up for the decline in consumption.
Offshore IG:
We feel constructive on IG given the uncertainty of the investment market. The US treasury yields remain lower and the credit risk is holding up relatively well. We believe the coronavirus will affect the market in the short term. On duration standpoint, we will take profit on long-dated bonds and selectively add high beta names going forward.
In contrast to equity markets, our Asian fixed interest strategy has performed reasonably well since the virus outbreak.
Data as at 31 January 2020
Source: Link Fund Solutions
*Since inception refers to inception of Premium Asia Income Fund (first full month, starting 31 August 2011)
The views expressed are the views of Premium China Funds Management & Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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