Commentaries

Markets update: Summer rally continues

11 September 2020

Ani Deshmukh

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

A combination of inflows into global as well as Asian credit, as well as moderating primary supply in the month given earnings season, helped support risk sentiment and tighter spreads in Asian credit last month. Continued headlines about progress in clinical trials for a COVID19 vaccine, a peaking out of new cases in key countries like the US and exuberant equity markets (led by tech) also contributed to sustained strength in risk appetite in Asian credit. While global credit performed well, Asia outperformed the rest of the EM space last month – Asian Hight Yield spreads tightened about 25bps, while IG spreads tightened about 10 bps. This compared to US IG tightening 5bps, and LatAm/ EMEA spreads tightening by about 20bps in August. Primary supply of US$21bn made it the slowest new issue month in Fy20 (excluding March), and new deals were well absorbed. A late-month US rates selloff introduced some volatility, but valuations have thus far held up.

 

Outlook and portfolio performance

While the recovery in credit spreads has been consistent with our expectations of a market-led recovery given the Central Bank liquidity support, the pace of recovery also bears witnessing. As the chart above shows, IG all-in yields at 2.85% are now back to the pre-COVID19 levels and closing in on their decadal tights. Hight Yield yields at 7% are however still about 200bps wider than the decadal tights, with the HY markets expanding materially in that period. The strength of Asian IG corporates and financials has been demonstrated in the recovery seem in the last 5 months, while HY sector remains industry-and-country dependent and therefore still offers some value, reflecting in part the higher uncertainties surrounding fundamental recovery post COVD19. Overall, we expect IG to remain well supported but more vulnerable to a rates-driven selloff. High Yield on the other hand could withstand an initial rates selloff better and therefore remains a bottom-up investing market for the remainder of the year. In this regard, the recent shift in focus by the Fed in their inflation targeting policy is significant. After more than a decade of targeting a 2% inflation level, the Fed has signalled greater tolerance for higher inflation in a bid to spur the economy and achieve peak employment. This indicates a greater tolerance for higher inflation and, as a consequence, could drive nominal rates higher over the coming months.

The ABTRF fund was up 0.4% in the month of August, as the fund remained close to fully invested with a net duration of 3.9 years and 4% cash levels. We have gradually increased our rates hedges, given the change in the Fed tone, and would look to maintain duration at between 3.5-4 years in the near term. A more hawkish outlook or stronger-than-expected fiscal and economic data would make us increase our rates hedges into the US Elections and the year-end. Any meaningful widening in spreads remains an opportunity to add risk in what is likely to remain a yield-starved investing environment in the coming quarters.

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.

Source: Nexus Investment Advisors Limited.