3 regions where you can get bang for your investing buck

Note: This video was taped on Wednesday 2 October 2024. 

If there is one thing investors have learned from this current economic cycle, it's that one size definitely does not fit all. Central banks are responding to their respective economies, most of which are moving at different paces. This explains, in part, why Reserve Bank Governor Michele Bullock is so adamant that Australia will not see any rate relief this year. 

This reality is also upsetting the conventional wisdom for credit investors, like John Stover, Portfolio Manager for the Tribeca Asia Credit Strategy. Once upon a time, emerging market economies had higher rates and far higher inflation than their developed market counterparts. But that's not the case this time.

"This time around, US inflation is actually higher [than Asian EM inflation]. But if you look at our portfolio, we invest in over 90% US Dollar bonds, so from that perspective, we are more exposed to the US rate hike and rate cut environment. 

We also invest in over 95% fixed coupon bonds, so when the US starts cutting rates, that's a big tailwind for us," Stover told me.

Equally unusual is the default cycle. Traditionally, Asian emerging market companies have a chequered history of bankruptcies and refinancing. If you need proof, ask Stover about his profitable trade shorting Chinese property developer bonds. But this time, the Asian EM default cycle has likely preceded the developed market default cycle - and that's good news for investors.

"In Asia, we have already gone through that difficult environment ... you're likely to see defaults move lower in this part of the cycle and even in a US recession," Stover said. 

In this edition of The Pitch, Stover sits down with me to discuss all of the above concerning Asian credit investments. He'll also tell us about his investment process for finding long and short credit ideas, and where he is finding the biggest rewards for the lowest risk today.

Edited Transcript

LW: How is Asian credit positioned with the current macro environment (and its nuances) in mind?

Stover: I think this interest rate cycle is pretty unique in the history of the modern economic world. China is its own animal. You've had deflationary forces there, with rates and government bond yields at all-time lows. Japan has had multi-decade record lows of interest rates and those interest rates are starting to come up at the same time. Now, the US is starting the rate-cutting cycle. 

The other interesting thing about it, is that emerging market Asian rates have been lower this time of the rate hiking cycle than what you see in the US. That's unique in the history of the modern economic environment. 

So historically, Asian emerging market rates have always been higher than the US because inflation has been higher in those countries. This time around, US inflation is higher. 

If you look at our portfolio, we invest actually in over 90% US dollar bonds. From that perspective, we're more exposed to the US rate hike and rate-cutting environment and we invest in over 95% fixed coupon bonds. When the US starts cutting rates, that's a big tailwind for us. What you are also seeing is emerging market Asian countries, Indonesia for instance, just started cutting rates. You're going to see them start to follow the Fed. That's going to be helpful for economic growth in those regions and I think that's going to benefit our portfolio. 

LW: What does the default landscape look like across Asia?

Stover: You have to split it between China property and everything else. I think what we are seeing in Asia is that the default cycle came a little bit earlier and all these companies had to go through that period where they didn't have that refinancing channel open. 

What we think going forward is that defaults are probably going to rise in developed markets like US and Australia. 

You're already starting to see that, particularly on the private credit side. I think there are a lot of risks there. But in Asia, we've sort of already gone through that really difficult environment in terms of the market and the refinancing channels. You're likely to see defaults track lower in Asia during this part of the cycle, even going into a potential recession in the US than you might see in the developed markets just because they haven't gone through that experience over the past few years. 

LW: Tell us how you seek winners and how you identify companies that could be short opportunities.

Stover: For our long portfolios, we're looking for companies that are producing cash flow and paying down debt. So we look for a declining leverage profile over the next few years, and we're looking to find opportunities where we have a variant perception [sic] relative to the market. So for instance, on the long side, where we have a more positive view of the market on where that leverage trajectory is headed and where we think the yield that's on offer in the market isn't being factored in yet. 

We spend a lot of our time modelling out company cash flows and balance sheets, looking through them and trying to understand not only where that leverage is headed but also what options for refinancing the company may have. 

Because what we care about is getting paid at par at maturity. We spend a lot of time thinking in our scenario analysis and trying to understand, even in a downside case, what levers a company has to pull to repay that bond at maturity.

LW: Where are you finding the biggest rewards for the lowest risk in this environment?

Stover: We really like India right now. That's a great macroeconomic story. We're finding good value there in the renewable space. That's been a key long for us for the past couple of years. And for BB credit, these are strong high-yield companies with 8-9% yields. These are companies that produce assets, they have long-term offtake contracts with government entities and so have much better value. 

One of the largest positions we have is [also] owned by the Singapore Sovereign Wealth Fund, who are the majority shareholder. There is much better value than what you're seeing for BB credits elsewhere in the world, say in the US or Europe. 

We also like Indonesia, we still like the macro trajectory there and that's been a pretty key position for us over the past several years. 

We also are finding some interesting things to do in Macau. That's been a bright spot in China's COVID reopening, but the valuations in the market haven't reflected that. We think what's going to happen, given some of the stimulus coming through, particularly on the consumer side that we've seen over the past week. That is going to benefit that region.

Learn more

The Tribeca Asia Credit strategy uses a long short approach to extract high-quality returns from the Asia Pacific corporate bond market. For further information, please visit their website.