The high yield market in China and Asia has undergone significant changes recently, with a more diversified market emerging as the majority of defaults have already occurred. The weighting of the China real estate sector in the JP Morgan Asian high yield index has dropped from 38% to 7%, indicating a broader diversification of asset classes. This shift is expected to improve performance as the default cycle in China and Asia reaches its peak.
Credit selection has become increasingly important for investors looking to generate alpha in this stabilized market. High yield investments are preferred over investment grade in Greater China, as they offer more opportunities for potential credit alpha. This strategic focus on high yield reflects a broader trend of capitalizing on the evolving dynamics of the market.
To navigate the volatility of the Chinese market, a long/short investment strategy may be beneficial for investors to take advantage of discrepancies in stock performance. Companies that have solidified their positions through improved financials and increased market shares are particularly attractive.
Key investment themes in the future are expected to revolve around artificial intelligence, state-owned enterprises, and the energy transition, which offer alpha opportunities for both long and short investment strategies. Diversification is crucial in the increasingly concentrated and unpredictable global markets, and China presents unique opportunities for those willing to navigate its complexities.
Policy support and market sentiment have been influenced by geopolitical tensions, electoral outcomes, and shifts in global interest rates. China has been viewed as a wildcard, with surprise easing measures in September leading to a rally in the markets. However, market volatility persisted as the National People's Congress (NPC) Standing Committee meeting approached in November, with a lack of new borrowing or spending initiatives.
Greater policy support is needed, including decisive actions on fiscal and monetary fronts, as well as fundamental changes to enhance consumer, investor, and business protections. Despite a recent letdown in stimulus expectations, there is a belief that further support will be provided as Beijing awaits more data on economic improvements and clarity on U.S. tariff strategies.
China is making significant progress in its structural transition away from its previous economic model, with efforts to derisk the property market and strengthen competitiveness in manufacturing and export sectors. While challenges remain, the right stimulus measures could prevent a deflationary spiral and accelerate recovery timelines. Early indicators show positive impacts in certain sectors, such as improved retail sales in October.
The upcoming Central Economic Work Conference (CEWC) in December is expected to announce increased deficits, expanded local government bonds, and enhanced support for consumption, the property market, and infrastructure. A decisive stimulus response could lead to a turnaround in the next 12 to 18 months, creating new alpha opportunities across various asset classes, particularly for active multi-asset strategies.
There are opportunities for investing in China equities, with high-quality companies offering attractive valuations. Despite the threat of additional U.S. tariffs and sanctions, Chinese firms have shown resilience. Companies that prioritize returning value to investors through dividends and share buybacks are expected to perform well.
In the fixed income arena, Greater China USD high yield credits have performed strongly, recovering from previous lows and being recognized as one of the best-performing asset classes year-to-date. As the market continues to evolve, investors should remain vigilant and adaptable to seize opportunities in this dynamic environment.