IG markets remain strong, pockets of weakness in HY

6 December 2019

Ani Deshmukh

RAM Active Investments RAM (Lux) Tactical Funds II - Asia Bond Total Return

Market Commentary

November was characterized by improved sentiment and the expectation of a resolution in the U.S.-China trade deal accompanied by a pause in existing tariffs, which largely helped risk sentiment turn positive. 10-year U.S. treasury yields widened about 13 bps in the month, while equity markets were higher, signalling the better risk sentiment. Geopolitical risks dominated news flow, with the HK protests and subsequent district council elections resulting in volatile domestic markets as well as EM sovereign new government concerns in Argentina and Sri Lanka. Credit markets for the most part are resilient, with HY largely flat and IG spreads compressing 5-10bps. Supply remained high, seeing $25.3bn in gross supply which resulted in YTD 2019 Asia bond supply crossing US$300bn for the second time in the region. The relative stability of the market, despite this expanded issuance, points to an ongoing bid for credit in Asia, mainly led by regional buyers.

Source : JP Morgan Research, Nexus

Portfolio Commentary

Credit has stayed resilient and in line with our expectations, as the conducive rates backdrop resulted in a bid for yield and both IG and HY bonds benefited. Underlying growth trends have been weakening, but as growth and return expectations are reset lower, credit compression has continued. China remains the focus for the markets, and recently we have seen Local Govt Financing Vehicles (LGFVs) displaying signs of liquidity stress. Certain issuers have run into onshore debt servicing trouble, resulting in the offshore bonds repricing lower by 20-50 points. In our view, the government is looking to contain systemic stress by limiting the fallout from defaults but is also conscious of not creating a moral hazard by providing bailouts. This is expected to create more dispersion in the LGFV space, as investors re-evaluate government support to these issuers. The rest of the HY markets are likely to see limited impact.

The RAM Asia Bond Total Return Fund was up 0.18% in November, bringing YTD returns to 10.1%. The Fund remains focused on high-quality IG credits (we have no LGFV bond exposure) with a net duration of 4.1yrs. As supply winds down, we stay constructive on the Asia credit space, looking to actively manage risk and exposure considering macro events.

Nexus Investment Advisors Limited, subject to the supervision of the Securities and Futures Commission (SFC) in Hong Kong, has been appointed by the fund's management company as investment manager to RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund.

*Sources : Nexus Investment Advisors Limited