By Jake Maxwell Watts
Junk bonds in Indonesia are Asia's top performer this year, a
sign of how global investors are venturing into riskier markets as
the search for high yields gets tougher.
Indonesian corporate U.S. dollar bonds have returned as much as
10.4% this year through Thursday, according to UBS data, nearly
three times the 3.7% return on China's high-yield property sector,
the next-best performing fixed-income asset class.
While the country is judged riskier than Kazakhstan and
Thailand, according to sovereign ratings agency Moody's Investors
Service, the lure is the high rates the Southeast Asian country
offers as benchmark interest rates fall across large parts of Asia.
The Indonesian government is in the process of pushing through
ambitious infrastructure development plans that investors hope will
spur growth and provide a platform for companies to expand.
By comparison, Indonesian 10-year government bonds in U.S.
dollars were yielding 7.7% Monday, with equivalent U.S. Treasurys
returning 2.1%.
"We think that based on credit fundamentals and technical
factors, there are still some Indonesian corporates offering enough
compensation for their risk," said Luc Froehlich, managing
director, head of fixed income in Singapore for Manulife Asset
Management.
The fund manager, which oversees around US$277 billion globally,
has had "a clear overweight" against an industry benchmark on
Indonesian corporate high yield debt for several years and hasn't
changed that positioning this year.
The booming market has encouraged more issuance too, with
companies selling US$875 million in high-yield bonds in three
offerings so far this year, up from US$774 million in the same
period a year earlier, according to Delaogic data.
Among them were telecommunications infrastructure companies PT
Tower Bersama Infrastructure and PT Solusi Tunas Pratama, which
raised US$350 million and US$300 million, respectively, in
February.
The strong performance of Indonesian bonds this year is in
contrast to the poor performance of the country's equity market,
which shed all of its year-to-date gains in just the last week to
become Asia's only net loser after a series of weaker-than-expected
first-quarter results. Indonesian stocks were at a record high as
recently as April 7, but have lost ground as weak results triggered
concerns about sluggish economic growth.
As with any risky investment, fund managers say that picking the
right companies is a challenge. Indonesian corporates, particularly
family-owned businesses, have a mixed record on servicing their
debt. Coal miner PT Bumi Resources, for example, failed to make a
scheduled payment on US$700 million of debt last year, prompting
credit-rating firms to declare it in default. Bumi is affiliated
with Indonesia's powerful Bakrie family.
"The high yield sector is dominated by these family-owned
companies and we're just not comfortable that they fully appreciate
their obligation to the bond market," said Jamie Grant, head of
Asia fixed income at First State Investments, which manages around
US$158 billion globally.
Mr. Grant, like many fund managers, has been looking at Chinese
high yield debt in the property sector, which has suffered broadly
after property developer Kaisa Group Holdings Ltd. got into trouble
late last year and subsequently defaulted on interest payments to
creditors.
"When the Kaisa news broke the whole sector repriced," he said.
"We in recent weeks have been adding back to our China property
high yield allocation in the better quality names."
Then there is the question of central banks. This year the U.S.
Federal Reserve is expected to raise interest rates, a move that
although widely expected could boost the relative attractiveness of
U.S. Treasury yields.
Some economists expect Bank Indonesia, by contrast, to cut
interest rates this year, a move that could lower bond yields. This
diversionary trend, which is taking place across Asia, could hit
the performance of corporate and government bonds.
Jens Nystedt, portfolio manager and head of sovereign research
for Morgan Stanley Investment Management's emerging markets debt
team, says there is value in Indonesian high yield, compared with
investment grade. But he said many borrowers already owe large
amounts of dollar-denominated debt with little earnings in the
greenback, a potential problem should the U.S. raise interest rates
soon, as is widely expected.
"We therefore tend to avoid pure domestic plays and instead
favor dollar earners or companies that generate strong and
predictable cash flows," he said.
UBS, which expects a further 0.5 percentage point cut to Bank
Indonesia's benchmark interest rate in addition to a 0.25
percentage point cut the central bank made in February, says it
still favors Indonesian corporate bonds compared with government
bonds.
"We expect the trade to perform on the back of the benign U.S.
rates environment and the quest for yield, especially after Chinese
high yield roared ahead," it said.
Write to Jake Maxwell Watts at jake.watts@wsj.com