Commentaries

Great expectations, greater returns

14 December 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 The expectation of volatility and increased risks due to the US election, a market scarred by its recent experience (2016 election day volatility) and the resurgence of COVID-19 painted a cautious backdrop at the very start of the month. The anticipated Blue Wave’s stuttering dropped UST yields in the longer-end on election day itself but over the course of the month risk was continuously deployed and the market focused on the positive narratives: the removal of election uncertainty, the vaccine developments which show strong efficacy of results and the potential for the normalisation of economic activity in 2021. The disperse relative states of economic strength remains, with China’s economy being the beacon of strength (as an example, the Composite PMI has remained above 53 for 8 months in a row and the November 55.7 print was the highest in the last four years.)
Within Asia credit, broadly, the rising tide did lift all boats but there were still pockets of dispersion. The stabilisation of rates led to an outperformance of long-end spreads (JACI Sovereign +2.5% in November). The late-month expansion of the US sanctions list caused an underperformance in specific Chinese SOE investment grade credits (i.e. CNOOC Ltd and CNCC Ltd). Finally, it is worth noting there was a bout of very localised volatility in a specific group of Chinese LGFV’s following a few defaults onshore. All in all, it was a month of significant spread tightening.
Asia Investment Grade spreads tightened by 16 bps this month, while High Yield spreads tightened by 72 bps. The spread of Asia High Yield over IG has compressed by 56 bps to close at around 547 bps. A net of USD -5.4 billion was issued during the month down from USD 22.4 bn in October. At month-end, Asia High Yield full year return sat at 2.1% whilst Investment Grade was above at 5%.

Outlook and portfolio performance

Even after the significant rally, value continues to remain in Asia credit both in Investment Grade and High Yield as the macro backdrop in the region is strong. Risk sentiment is positive and economies within the region are rebounding with COVID-19 currently well-managed. We expect markets to continue in the same direction, although, we will be watching developments in the Western hemisphere, the US-China sanction saga and the end of loan moratorium impacts on loan performance. The overall theme of low policy rates, supportive central banks and normalisation into 2021 will likely sustain markets, therefore credit should be the favoured asset class. The relative resiliency of credit spreads versus other assets classes remains the case. Wider Asia credit spreads compared to Emerging Markets regions and the US has continued to push inflows in November, to an eighth consecutive month. Given the time of year, new supply is unlikely to be significant until January 2021. Chinese developers still have unused quotas to refinance offshore bonds maturing before 1H21.

The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) fund was up 1.32% in the month of November, with gains mainly driven by High Yield and non-China Investment Grade spread tightening. The fund remains well diversified, invested with a net duration of 4.2 years and 1.82% cash level. 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.