This is not to say that all Asian issuers have done well. Differentiation has increased significantly and made in-depth bottom-up analysis even more crucial.
The Covid-19 crisis has introduced new variables that investors need to integrate into their assessments.
Issuers operating in a highly Covid-sensitive sector with limited or no policy support appear to have been hit the hardest (red box in Fig.3), while companies in less sensitive sectors with strong government support fared much better.
For example, the Chinese government was swift to react with monetary and fiscal support and the PBoC maintained ample liquidity in the system in 2020. This allowed high-yield real estate issuers to access local financing and the sector's bond prices rebounded quickly after Q1. By contrast, Indonesian real estate issuers are in much greater difficulty without government and local bank support.
But government support is only one part of the equation. Issuers' specific line of business matters a lot, and the reality is very much differentiated within sectors.
In real estate, commercial developers specialised in retail, office rents, or industrial parks - particularly hit by lockdowns - have been strongly impacted. Many saw their credit ratings downgraded. By contrast, the shift to online shopping has increased demand for fulfilment centres, benefiting industrial and logistics property companies. On the residential front, work from home boosted demand for home improvements, proving positive for certain residential home builders.
Another illustration is the resilience of South African gold exporters, despite the relatively poor response from their government in curbing the pandemic.
While government's response and a sector's sensitivity to the Covid-19 crisis are important factors driving a company's resilience, investors still need to perform in-depth company analysis.
How a company’s management reacted is vital for its success in navigating the crisis. Did they actively re-negotiate their re-financing terms? Can they cut capex? How sensitive are revenues to domestic Covid policy/ economic activity or global external demand? Does the company have access to local bank financing to improve liquidity? These are all questions that need to be considered as part of active bottom-up selection.
Examples from our EM Corporate team:
1. Impact of proactive liquidity management
A large South African chemicals and energy company, whose products are classified as essentials, saw its bonds plummet in March 2020 partially as its downgrade to high yield by Moody's and S&P led to forced selling by investment-grade investors.
In our analysis, the issuer stood out as extremely oversold given its resilient business profile. More importantly, with limited liquidity support from South African policy makers, its management proactively boosted liquidity by cutting cost, accelerating asset sales and re-negotiating loan covenants. Bond prices rebounded to around par in the second half of 2020.
2. Impact of poor sovereign response
A large Argentina oil & gas company, with greater scope to survive the crisis than many small independent oil & gas producers should have benefited from the rebound in oil prices. But because of the Argentine sovereign debt crisis, the central bank banned that company’s access to dollar capital, which created liquidity stress.
With a lower default rate than US high yield in 2020, the EM credit market has shown better resilience to the Covid-19 crisis than developed markets.
The Covid crisis will leave scars. Government response and sector sensitivity are important factors to gauge companies' ability to navigate the turmoil. But above all, by amplifying differentiation, the Covid-19 crisis has shown that a multi-dimensional, bottom-up analysis of individual companies' fundamentals is key.
This marketing material is issued by Pictet Asset Management (Europe) S.A.. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The latest version of the fund‘s prospectus, Pre-Contractual Template (PCT) when applicable, Key Investor Information Document (KIID), annual and semi-annual reports must be read before investing. They are available free of charge in English on www.assetmanagement.pictet or in paper copy at Pictet Asset Management (Europe) S.A., 15 avenue J.F. Kennedy, L-1855 Luxembourg, or at the office of the fund local agent, distributor or centralizing agent if any. The KIID is also available in the local language of each country where the compartment is registered. The prospectus, the PCT when applicable, and the annual and semi-annual reports may also be available in other languages, please refer to the website for other available languages. Only the latest version of these documents may be relied upon as the basis for investment decisions.
The summary of investor rights (in English and in the different languages of our website) is available here and at www.assetmanagement.pictet under the heading "Resources", at the bottom of the page.
The list of countries where the fund is registered can be obtained at all times from Pictet Asset Management (Europe) S.A., which may decide to terminate the arrangements made for the marketing of the fund or compartments of the fund in any given country.
The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments or services.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management (Europe) S.A. has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested.
The investment guidelines are internal guidelines which are subject to change at any time and without any notice within the limits of the fund's prospectus.
The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a specific security is not a recommendation to buy or sell that security. Effective allocations are subject to change and may have changed since the date of the marketing material.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares.
Any index data referenced herein remains the property of the Data Vendor. Data Vendor Disclaimers are available on assetmanagement.pictet in the “Resources” section of the footer.
This document is a marketing communication issued by Pictet Asset Management and is not in scope for any MiFID II/MiFIR requirements specifically related to investment research. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any products or services offered or distributed by Pictet Asset Management.
Pictet AM has not acquired any rights or license to reproduce the trademarks, logos or images set out in this document except that it holds the rights to use any entity of the Pictet group trademarks. For illustrative purposes only.