Commentaries

15 May 2020

Ani Deshmukh

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

Market outlook

After a difficult March which saw risk capitulation as well as illiquid markets, April was characterised by stronger Central Bank (CB) support especially in developed markets, which helped restore a degree of investor confidence on state and monetary support during this pandemic. Correlations amongst asset classes remained high, with equity as well as credit markets recovering from late-March lows. Asian IG spreads tightened by 5-10bps, while HY markets were stronger and spreads tightened about 90 bps in the month. Asian equity markets also rallied with MSCI Asia up 8%, following a 11% increase in the S&P500. While sentiment remained fragile, the peaking of Covid19 cases in the West, particularly in Europe, coupled with indications of a peak in the US raised hopes for an end to the lockdowns. Underlying earnings remained weak as companies increasingly withdrew guidance for the remainder of 2020 or guided lower, and the mid-month collapse of oil prices sending the WTI futures into negative territory highlighting pressure on commodities and the demand destruction brought about by these shutdowns.

Asia Bond Spread

Source: Bloomberg, RAM AI

Fund performance and positioning

The concerted action by DM Central Banks has helped put a floor on sentiment, leading to a modest recovery. As can be seen from the chart above, spreads have retracted some of their widening in March but remain materially wide of levels in Jan-Feb 2020. The lockdown has meant that earnings for most corporates have taken a hit for at least 1H2020, and spreads are in part reflecting the uncertainty of the coming months. However, we believe that the Asian IG bond space is by and large well positioned to withstand the cashflow pressures of 2020. Primary issuance has reopened, and Asia has seen IG corporates as well as sovereigns re-tap the market in recent weeks, which adds liquidity buffers to company balance sheets. While the reopening process would be gradual, we are already seeing some signs of activity resuming in Asia – domestic travel in countries like China and Korea has picked up, and HK is looking to ease curbs. Opening of borders will remain a more nuanced issue, but we believe that as countries restart their domestic economies the intense lockdown pressures will ease and provide a path out of the current situation.

The RAM (Lux) Tactical Funds- Asia Bond Total Return Fund was up 1.06% in April, with lower spreads helping recover some of the MTM from March. The Fund has rotated into higher quality IG corporates and financials recently. While the rally in High Yield spreads has been stronger than IG in April, part of that is due to the relatively low liquidity in HY which has resulted in prices getting marked up as sentiment recovers. We also continue to believe that the outlook for HY credit remains challenging, and bond spreads in this category will remain volatile. We are underweight HY in the Fund relative to the benchmark (14% vs 23%) and believe that the portfolio is much more conservatively positioned, as is appropriate for the current economic climate. The Fund remains liquid, and we continue to be focused on adding to/rotating out of positions as the markets reopen.

 

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