Commentaries

A December to remember

14 January 2021

Ashwin Aiyappan, Nevin Nie

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

Markets update

A dramatic, volatile and challenging year for the world ended with a continuation of November’s pattern of broad asset-class performance and appreciation. Worsening COVID-19 numbers, mutant variants of the virus and limitations on the distribution of vaccines, were disregarded as markets looked forward to normalisation in 2021 and looked back on the fiscal/monetary support deployed in 2020. There was a minor concern around Brexit but an accident avoided gave markets one final push at the close of the year. Two notable facts may have helped the performance in the credit asset class: volatility was dissipating, in a year marred by it, and December produced only 2 days during which the S&P moved greater than 1% (November had such 11 days, October had 8 days and September had 12 days) and rates were benign after the first days of the month. The disperse relative states of economic strength remains but PMIs drifted lower month over month in China, USA, etc. They remain firmly in expansive territory and the trailing Markit Eurozone Composite PMI moved to 49.1 in December from 45.3. Oil continued its move higher and the USD continued to drift lower.
Asia credit, received significant tailwinds from higher oil prices (HY), broad USD weakening (Asia EM) and higher but range-bound yields (credit broadly and duration specifically.) Compression and credit curve flattening continued from November. The one laggard area remained the Chinese credits on the US sanctions list, leading to continued underperformance in specific Chinese SOE investment grade credits (i.e. CNOOC Ltd and CNCC Ltd). December was more or less a repeat of November’s significant spread tightening and spread compression. Asia Investment Grade spreads tightened by 7 bps, while High Yield spreads tightened by 63 bps. The spread of Asia HY over IG has compressed by 56 bps to close at around 477 bps. A net of USD -0.9 billion was issued during the month up from USD -5.4 billion in November. At year-end, Asia HY 2020 return was +4.94% whilst IG closed at +6.86%. The benchmark JACI’s 2020 return was +6.33%.

Outlook and portfolio performance

Even after another month of rallying spreads, value continues to remain in Asia credit, both in IG and HY, as the macro backdrop in the region remains strong. Risk sentiment is firm and economies within the region continue with their resiliency with COVID-19 currently well-managed. We expect markets to continue to remain firm, although, we will be watching developments in US interest rates, the US-China sanction saga, COVID-19 mutations/vaccine efficacy and distribution logistics, 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. Nonetheless, we begin the new year slightly overweight on cash and underweight duration, as rates could push higher in January, with commodity prices, weak USD and economic normalization putting pressure on 10-year and 30-year yields, which look too low in our view. The relative resiliency of credit spreads versus other assets classes should remain the case but interest rates could pressure duration over the coming weeks. Asia credit spreads remaining wider than Emerging Markets and US counterparts pushed inflows in December, to a ninth consecutive month. Inflows, as well as a light calendar in December helped spread compression. Given the beginning of the new year and a late Chinese New Year (mid-February), new supply is likely to be significantly large and could limit spread performance in the first half of Q1.

The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) fund was up 0.65% in the month of December, with gains mainly driven by HY names and non-China IG spread tightening. The fund remains well diversified. We are tactically lighter on risk currently, around interest rate concerns and the potential for supply-driven opportunities, with a net duration of 3.98 years and 4.4% cash level. We would look to rotate out of cash and tightly traded IG bonds into new issues, strong BB credits and/or duration as opportunities present themselves.

Source: Nexus Investment Advisors Limited.