Asian high-yield bond have been analyized hot favorite among institutional investorsThese are the results of recent years.

Also known as junk bonds, they are non-investment grade debt securities that carry bigger default risks — and therefore, higher interest rates to compensate for them.

A recent, high-profile instance was the debt crisis at China’s Evergrande. The world’s largest property developer and owner is at the edge of bankruptcy, with more than $300 billion in liabilities. In September, fears of an even wider contagion in the sector and possibly the economy prompted a worldwide sell-off.

CNBC asked five strategists, portfolio managers, and analysts: What advice would you give investors in order to invest in high-yield Asia bonds given the uncertain market for junk bonds in China?

China realty bonds are the largest source of junk bonds in Asia. Evergrande’s debt crisis unraveled. other Chinese real estate developers also started showing signs of strain – some missed interest payments, while others defaulted on their debt altogether.

Below are 5 responses by CNBC strategists:

1. Martin Hennecke St. James’s Place
Communications and investment advice for Head of Asia

Hennecke insists on the “abstention of the use of leverage in any bonds or bond fund at this time”, which refers to the practice borrowing money for investment.

He stated that the predictability of high-yield bonds’ returns “isn’t as clear cut… so such a strategy could turn out to have much greater risk than expected.”

CNBC was told by he that the “recent sharp sell-off Asian high yields coupled with the possible default of restructuring some is a good illustration of this.”

Hennecke said that investors need to diversify internationally in order manage country and sector risks.

Investors should diversify across asset types as well. He noted that fixed interest is vulnerable to not only default risks but also to interest rate and inflation risk. He said that rising price pressures “are arguably on the increase and may be under-estimated today.”

However, investors shouldn’t completely abandon high yield bonds.

“All this being said, Asian Junk Bonds have sold off quickly, sending yields significantly higher. I think that as long as you are aware of the potential risk, the asset class shouldn’t be excluded in well diversified portfolios.”

2. Wai Mei Leong, Eastspring Investments
Fixed income portfolio manager

Leong stated that China accounts for half of Asia’s high yield bond markets. However, developments in China’s property sector will likely impact investor sentiment. He said, “But we believe there are opportunities for the discerning investor.”

She said that China’s historic property sector was subject to periods of policy-driven volatility. However, she acknowledged, however, that “we recognize the unprecedented depth and scope of these policy measures this time.”

Leong stated that the real estate industry is still a major driver in China’s economy. It accounted for 27.3% fixed asset investments for the country in 2020 and was a significant revenue source for local governments.

The Chinese government would rather have a strong property sector than multiple large-scale defaults that could trigger systemic risk.

Leong said that the future growth of China’s middle classes, as well as urbanization, and development of megacities will continue to boost revenues for the property industry.

Leong stated that “investors will likely reassess the risk expectations toward the Chinese high-yielding property bond industry in the short term.”

She said that China’s push to lower its debt in the property sector would eventually lead to “stronger market discipline”, and improve their bond quality.

3. Arthur Lau, PineBridge Investments
Assisting the head of fixed income in emerging markets and Asia ex-Japan

Lau predicted that the sector’s defaults will increase in the future.

He said that he didn’t anticipate defaults at specific companies to lead to a systemic crisis.

He also said there will likely be policy easing on Beijing’s part — such as faster approval of mortgage applications and reopening of onshore bond market to stronger and better quality property developers.

Lau said that all this should ease liquidity worries.

He pointed out, however, that only a few property developers can continue to raise funds via the equity market. This includes rights offering and share placements as well as selling assets.

Lau stated that the stronger developers will come out of this crisis “even more stronger”, while weaker businesses may default.

“Consequently, we cannot stress more the importance credit selection to select the winners and avoid losers,” he stated, noting that his company expects a very good return over the next six to 12 month if investors can find survivors and accept the volatility.

4. Sandra Chow, CreditSights
Asia-Pacific Research Co-head

Chow said that he would continue to support China’s more conservative credit ratings, noting firms with lower debts or strong links to government.

She said that high yield credit in India and Indonesia have proven to be more stable and are better supported by foreign investors looking for diversification from China.

She concluded that although we wouldn’t completely avoid high yield, it is important to make the right credit choices.

5. Carol Lye, Brandywine Global (investment manager under Franklin Templeton)
Associate portfolio manager

Chinese real estate firms issuing high-yield bonds have been sold off since August, particularly the lower quality bonds — but they later rallied, thanks to verbal interventions from Chinese authorities, Lye said.

Last week, however, Chinese real property bonds suffered another selloff. The portfolio manager stated that they were “by far” the worst.

“This concern was raised by concerns about concealed debt and contagion within higher quality.” [BB-rated]All names were sold in a massive fire sale. “Quality names are trading at 80 cents.”

B and BB-rated name bonds are low quality bonds with low credit ratings. They are also commonly known as junk bonds. However, BB rated bonds have a slightly higher quality rating than B-rated bonds.

News possible changes in the three red line waiver for mergers and acquisitionsThe market was “helped to stage an unprecedented whipsaw rally, especially in quality name,” she stated. She was speaking about China’s “three lines” policy that was introduced last year. The policy limits the debt to be incurred relative to cash flows, assets, and capital.

Another encouraging sign for investors was a change in the issuance of interbank notes onshore and an increase in mortgage loans from October.

She said, “This volatile wild market phenomenon is rare and offers up the opportunity to be placed in quality names.” But caution is advised as volatility will likely continue because many property companies still have tight liquidity.