Commentaries

Noise and Signal

8 February 2021

Ashwin Aiyappan, Nevin Nie

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

Markets update

As we began January, we started with asset valuations coming in after a singularly strong two months period post the US elections. The month began with the expected seasonal risk asset rally but was followed by various episodes that served as a reminder of the challenges ahead. Stimulus headlines drove the reflation trade but was accompanied by a sharp move in longer end US yields. This was a reminder of the push-pull that fixed income will perhaps face in 2021. The narrative then moved towards potential US unrest, COVID and related challenges (mutations, vaccine progress and so on,) and ended with the crescendo around a reddit thread and one stock capturing the world’s attention - GameStop Corp. The month reinforced in a small period the various potential catalysts to be buoyant about and challenges we need to navigate. The S&P 500 Index, the global risk asset barometer, painted the noisy month by being up 2.5% and finishing lower on the month. This will certainly be a year where separating signal and noise will be a critical narrative for risk management. As we move into February, the combination of supportive monetary policy, potentially significant fiscal support and economic normalization remain.
Within Asia credit, the market gyrations were also noticeable with interest rate moves and continued US sanctions list pressure creating dispersion in various Asian credit market subsectors. The outperformer was High Yield, where shorter duration combined with yield and a positive regional economic outlook, led to outperformance. In fact, though, there were individual credits under pressure in China High Yield (China Fortune Land) and non-China High Yield, the market’s development was highlighted by limited spill over from individual credits to the broader asset class. Correlations were significantly higher in Asia High Yield in its nascency the decades before. Mainly due to rates, the Investment Grade component of the JACI was the underperformer.
Asia Investment Grade spreads tightened by 8 bps this month, while High Yield spreads tightened were unchanged. The spread of Asia High Yield over Investment Grade has decompressed by 8 bps to close at 485 bps. USD +55 bn was issued during the month. It was the strongest January primary issuance on record.

Outlook and portfolio performance

Our thesis remains the same, 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 in credit is positive, as it weathered the macro and rates volatility well in January. The COVID-19 developments, whether mutations and continued spread, are still worrying but the vaccination rollout is a strong positive catalyst going forward.
The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class-PI USD net of fee*) was up 0.11% in the month of January, with gains mainly driven by 2027 dated IG bonds (a core tactical call in Q4 2020.) The fund keeps a well-diversified positioning. We remain invested with a net duration of 4.21 years and 3.81% cash level, and we would look to rotate out of tightly traded Investment Grade bonds into new issues or strong BB credits with rating upside and shorter duration over the next month.

 

Source: Nexus Investment Advisors Limited.