Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Thanks for listening, and now onto today's show.
Speaker: Welcome to HSBC's Global Viewpoint.
Speaker: My name is Keith Chen, HSBC's Head of Asia Credit Research, and I'm pleased to be joined by my colleague today, Louisa Lam, who is Director of Asia Credit Research.
Speaker: Hello, Louisa.
Speaker: Hi, Keith.
Speaker: Great to join you.
Speaker: Great to see you.
Speaker: So in this podcast, we are going to talk about the challenges faced by Asia Credit market to date.
Speaker: And we are going to highlight ESG bonds that stands out both in terms of issuance activities and the relative performance.
Speaker: To begin with, Asia Credit has a difficult first half of the year on the back of the huge uptick in US Treasury yield, which caused stringent of issuance activities in this part of the world.
Speaker: Specifically, gross issuance activities for Asia dollar bond space was down by more than 40% year over year.
Speaker: In particular, from a net issuance perspective, the Asia dollar bond space shrinks by US$5 billion in the first half of the year.
Speaker: That means that we have more redemptions than issuance in the first half of the year.
Speaker: mainland China issuers, which used to contribute 70-85% of the region's net issuance activities between 2015 and 2019, they all turned into net redeemer of bonds in the first half of the year with an aggregate US$21 billion of net redemptions.
Speaker: Primary market for high-yield corporates in Asia is largely shut and dysfunctional with net redemptions witnessed across major sectors.
Speaker: In this backdrop, we revised our 2022 full-year gross issuance forecast of Asia dollar bonds to a range of $200 to $235 billion that compared with the $110 billion gross issuance that we witnessed in the first half of the year,
Speaker: We also expect in the second half of the year, primary market to be shut to most high-yield corporates in Asia.
Speaker: At the lower end of our issuance forecast, we could foresee up to US$50 billion of net redemptions for mainland China issuers for the full year of 2022 that equates to US$30 billion of net redemptions in the second half of this year.
Speaker: ESG bonds really stand out, both in terms of issuance activities and the relative performance versus conventional dollar bonds in the Asia space.
Speaker: Luisa, can you shed more light on this particular point?
Speaker: Sure, Keefe, green bonds are booming in Asia, and definitely they are one of the few bright spots in the still struggling Asia US dollar bond market.
Speaker: In first half of 2022, a total of $65.5 billion of new green social and sustainability bonds, in another word, ESG bonds, were issued.
Speaker: It accounts for about one-third of the total US dollar bond issuance in the Asia-Japan credit universe, compared to 22% in full year of 2021 and just 10% in 2020.
Speaker: We expect this percentage to persist for the rest of the year.
Speaker: Investment-grade Asia-USD bond, ESG bonds, have outperformed their conventional peer, indeed, across market, sectors, tenors, and credit rating.
Speaker: Compared with those conventional bonds, the ESG bonds actually tend to have stronger investor stickiness, shorter duration, and relatively better disclosures.
Speaker: In higher yield space, however, they are exposed to same market volatilities as their conventional peers, as overall credit concerns have overwritten ESG considerations.
Speaker: This was especially true in the China property sector.
Speaker: So the question that a lot of investors will ask from time to time is, who are the main issuers in the ESG dollar bond space in Asia, and where do the money raise go?
Speaker: Banks and financial institutions are the biggest ESG bond issuer, followed by renewable, utility, and property companies.
Speaker: The proceeds of these bonds are mostly direct to the projects in development sectors, such as renewable energy,
Speaker: green buildings and infrastructure, as well as measures aimed at increasing energy efficiency.
Speaker: All these projects are in line with the transition goals of governments across the region, especially on the carbon neutrality, or in other words, net zero.
Speaker: Interesting.
Speaker: Are there any concerns from your perspective
Speaker: Some disclosures and high information transparency are required to minimize the risk.
Speaker: Issuers are now required to release a set of pre-issurance documents to specify their use of proceeds and proposed ESG projects.
Speaker: And after the bond issuance, post-issurance documents are required to list out the actual allocation of the proceeds and, if possible,
Speaker: their environmental impact result from the projects, such as how much carbon emissions is reduced or avoided and how much energy is saved.
Speaker: For Asian companies, there is still room for them to improve in terms of disclosures, but we are definitely seeing their progress.
Speaker: I would say we believe that ESG labor bonds will be the key driver in Asia-US dollar bond market.
Speaker: Despite recent market volatility, this is highly supported by governments across the region.
Speaker: Indeed, the governments are taking measures to facilitate capital's integral project as well.
Speaker: They have set up green taxonomies to standardize and enhance market standing.
Speaker: For example, China, they have published their own Green Bond Project Catalogue last year, and Asian countries are putting together their own set of green taxonomies as well.
Speaker: So Green Bond Market is definitely one of the key projects and the channel that they are looking after.
Speaker: Thanks, Luisa.
Speaker: That's pretty promising from my perspective.
Speaker: Looking ahead in third quarter of 2022, we believe the stars are aligned for improvement in performance, particularly towards the Asia investment-grade dollar bond space.
Speaker: We look into various factors in terms of investor positioning that has been light as we speak.
Speaker: Valuation has been at depressed level, particularly towards the high-yield spectrum.
Speaker: Sentiment has been weak, if not the weakest in years.
Speaker: Regulatory backdrop, on the other hand, is getting into more benign stage.
Speaker: And most importantly, policy easing is to come across various sectors in the Chinese economy.
Speaker: So that's all we have for the time of today.
Speaker: We hope you enjoy our conversation.
Speaker: If you are interested, please speak to HSBC representative.
Speaker: Thank you.
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