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Fund managers see value in Asia bonds for 2019 after bad year

[HONG KONG] The Asian dollar bond market is finishing its worst year since 2013. But strong fundamentals in many sectors and expectations for support from policy makers next year mean there are pockets of value, more investors are saying.

Debt buyers are closely watching for any additional credit easing in China, which could reduce funding pressures for some borrowers from the nation, the biggest issuer of the securities. Average yield premiums on Asian US currency high-yield bonds rose last month to the highest since March 2016, according to a Bloomberg Barclays index.

"There are quality opportunities because everything has widened out, and we don't have to take as much risk," said Elisabeth Colleran, a portfolio manager on emerging market debt at Loomis, Sayles & Co. "The valuations and the fundamentals remain very strong."

After rate hikes by the Federal Reserve and global trade tensions brought gloom to the Asian dollar bond market this year, the notes may outperform other debt markets in 2019 and deliver gains, according to Ms Colleran. Some investors say the region's stable macroeconomic and corporate fundamentals make its bonds appealing.

Market voices on:

The risks haven't gone away though. Ms Colleran said one of the big concerns is the possibility of increased protectionism. Elections in Indonesia and India in 2019 are also in focus and have the potential to unnerve Asia credit markets if incumbent leaders don't win as expected.

Here are some more investor views:

Wai Mei Leong, portfolio manager at Eastspring Investments

Some of the top picks are within the Chinese asset management company industry, where spreads have widened to levels that justify taking risks, particularly because the firms are considered systemically important

Defaults are likely to remain limited to smaller fringe players in some sectors

Loh Jian Wei, portfolio manager at Nikko Asset Management

Expects low single-digit positive returns for Asian IG bonds in 2019, with Asian HY outperforming IG

Within China HY, sees more potential for short-dated property bonds than for industrials

Overweight on financial subordinated debt in countries with strong banking systems such as Singapore and Hong Kong

Underweight Philippines sovereign and South Korea credits on valuation; neutral Indonesia IG

Jimond Wong, a senior portfolio manager for Asia fixed income at Manulife Asset Management

More constructive on Asia dollar fixed income for 2019, and prefers going down the credit curve to high yield as the correction throughout 2018 was more drastic there

Sees a slight easing bias in China due to trade pressures and to offset deleveraging policies

Prefers Chinese credits most, likes Indian ones the least

Elisabeth Colleran, portfolio manager at Loomis Sayles

Skeptical on Chinese industrial space as yields have risen a lot and it's harder to get good information

Sees opportunities in Chinese property bonds and Indonesian high yield, and also value in quality Indonesian corporates, quasi-sovereigns

Also likes Indian issuers such as clean energy companies after declines

Mark Haefele, CIO, and Min Lan Tan, APAC investment office head, at UBS Global Wealth Management

Expect Asia credit to generate about 3–4% total return in 2019

Short-dated HY Chinese property developer bonds, bank Tier 2 debt and select Chinese state-owned enterprises among picks