Commentaries

A mini correction

12 October 2020

Ani Deshmukh

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

Markets update
Asian hard currency credit spreads moved back to end of July levels, declining for the first time since March 2020, as a global equity market correction fuelled risk-off sentiment, combined with the rippling effect of China’s new funding rules for real estate companies on property HY issuers. Supply also contributed to the weakness as USD 41.6bn of new issues in September made it the region's highest month of issuance in history. Asian HY spreads widened about 57bps, driven by China high yield which widened about 90bps, while IG spreads widened about 10 bps. The market subsequently stabilized in the last two trading days of the month, as Evergrande, one of China’s largest and most-levered developers, managed to partially resolve its liquidity overhang, driving a recovery of spreads that last into early October. Headlines that Chinese government would leave a period of three years for real estate companies to de-leverage and meet the required financial ratios, instead of immediate implementation, also brought some life back to the beaten sector towards the end of the month.

Outlook and portfolio performance
We see value emerging in Asian credit, especially HY, although the macro backdrop still remains mixed. Overall risk sentiment depends on US election, as well as the progress on the US government’s second round of stimulus checks. Supply is expected to remain elevated into year-end, given bond maturities USD16bn per month on average in the fourth quarter. However, the unexpected selloff in Asian HY in September, namely in China property bonds, has brought valuation back to more attractive levels. Asia HY corporate spreads were above 220bps wider than US HY spreads as of end September, versus about 180bps as of end August. Asian IG corporate spreads were above 42 bps wider than US IG spreads as of end September, flat compared to one month before. From a macro standpoint, emergent concerns about Covid-19 cases in DM (Germany, UK and France seeing higher numbers) as well as the looming US elections and President Trump’s illness remain near-term headwinds. We expect markets to consolidate at current levels, as investor are likely to remain selective and wait for either better valuations for an entry point or for clarity to emerge from the US in early-mid November before deploying capital. The overall theme of a low rate environment into 2021 will sustain, however, and credit remains a favoured asset class from that perspective. Spread compression may resume with improving news flows. Besides macro headlines, the market will also focus on China property sector’s contracted sales performance in October Golden Week holiday, as well as a few major developers’ asset disposals to gauge the deleveraging progress. The September contracted sales figures continued to be strong with top 100 developers in the country recording a 24.8% yoy growth, versus 29.2% in August, and 24.8% in July. This indicates a still solid backdrop for the current valuation of China HY property sector, which is a dominant part of Asian HY credit.

RAM (Lux) Tactical II Funds - Asia Bond Total Return Fund (Class PI USD) was down 0.69% in the month of September, with the decline caused by both IG spread widening as well as the HY sector selloff. However, the fund remains well diversified and the recovery in HY spreads in early October has also been benefiting the fund’s performance. We remain invested with a net duration of 3.95 years and a 4.86% cash level, and would look to rotate out of IG into strong BB credits if opportunities appear in the form of better valuations/spread over the next couple of months.

Source: Nexus Investment Advisors Limited.