Commentaries

Risk-off in preparation for US election

13 November 2020

Ashwin Aiyappan, Nevin Nie

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

Markets update

Asia credit spreads diverted between Investment Grade and High Yield in October, as investors leaned to a prudent tone ahead of the coming US election. Asia Investment Grade spreads tightened by 13 bps this month, with investors seeking to hide in quality, while High Yield spread widened by 11 bps. IG spreads tightening was also partially driven by the rates move, as US 10-year Treasury yield widened nearly 20 bps during the month. During the month, the spread of Asia High Yield over IG has gone up by 24 bps to close at around 500 bps, the highest level since July. A surprised jump of COVID-19 cases in both Europe and United States in the second half of the month further prompted investors to dump risk assets, causing High Yield spreads to jump 20 bps in that period alone. The continued fiscal impasse in US only added weight to riskier assets. Net supplies of new issues, however, slowed down a bit as markets turned volatile. A net of USD 22.4 bn new issues were printed during the month, down from USD 27.8 bn in September. Closing the month, Asia High Yield slipped closer towards a full year total return loss whilst Investment Grade remained comfortably up at over 6%.

Difference between Credit Spreads of Asia USD High Yield vs Investment Grade


Source: JP Morgan, as of 30.10.2020

Outlook and portfolio performance

Value continue to emerge in Asia credit both in Investment Grade and High Yield as the macro backdrop is likely to stabilize after the US election. Overall risk sentiment has improved in the beginning of November, with central banks toning up to take actions if Covid-19 lockdown continues. We expect markets to gradually recover back to pre-September levels, although investors are likely to remain selective and watch out for rating downgrade risks. The overall theme of low-rate environment into 2021 will sustain, therefore credit remains a favoured asset class. Among recent risk assets selloff in global markets, spread products have been proved more resilient and less volatile than equities. As Asia credit spreads stay wider than Emerging Markets and US counterparts, the region has continued to see inflows in October, for seven consecutive months. Total AUM of Asian USD credit funds continued to grow, reaching approximately USD 42 bn, the highest in 7 years, according to JPMorgan estimates. Such inflows, as well as a pause in new issues in the final week of October, has pushed a significant spread compression in early November, with Investment Grade and High Yield tightening led by Chinese Technology and Real Estate companies respectively. That said, new supplies are likely to come back in size later in November, given bond maturities of an average of USD16 bn for every month in the fourth quarter. Many Chinese developers still have unused quotas to refinance offshore bonds maturing before 1H21. Besides macro, Chinese government’s attitude towards the property sector will also affect sentiment in Asia High Yield. Recent headlines of Beijing allowing selective major developers to access China’s onshore interbank bond market have eased some concerns of tightened financing channels for the sector.

The RAM (Lux) Tactical Funds II – Asia Bond Total Return Fund (Class PI USD) fund was up 0.33% in the month of October, with gains mainly driven by the Investment Grade spread tightening, the US Treasury hedges, as well as certain China property High Yield bonds bounce back from lows reached at the end of September. The fund remains well diversified; both rates and risk rally in early November benefitted the fund’s performance. We remain invested with a net duration of 4.1 years and 4.79% cash levels, and we would look to rotate out of tightly traded Investment Grade bonds into new issues or strong BB credits with rating upside over the next couple of months.

 

Source: Nexus Investment Advisors Limited.