Commentaries

Carry on?

10 June 2021

Ashwin Aiyappan, Nevin Nie

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

Markets update

When considering the broader cross market moves and narratives, the uneven nature remains. The month began with a large miss in US NFP and was followed by a red-hot inflation number (a theme globally). May also brought a mix of Chinese policies that are hard to distil. Within the month, we also had a return of the retail investor patterns we saw at the beginning of the year, after a fairly sharp drop in and consequent rally, in equity indices mid-month. Similar to April, interest rate volatility dissipated and brought a rally broadly in global credit. Nonetheless, we had large 24 hour swings in US interest rates as the deviations from expectations were noticeable on a few important data points.

In Asia credit, it was a month where the majority of bonds participated in the global credit rally but a few pockets of idiosyncratic weakness continue to add waves under the surface. The COVID developments in India were overlooked and even Indian credit performed well. The push-pull factors remain with yields still tenuously placed due to the building signs of inflation, specifically due to commodity prices, potential normalisation/DM growth and supply-side constraints, offset by a return of COVID concerns around the developments (cases and the Indian variant). China Huarong Asset Management bonds continued to head lower, despite the commitment to pay imminent maturities, as the market continues to await the plan/announcements from central authorities.        

Asia Investment Grade spreads widened by 4 bps this month, while High Yield spreads tightened by 3 bps. The spread of Asia High Yield over IG has compressed by 7 bps to close at around 457 bps. At month-end, Asia High Yield return sits at +2.57% whilst Investment Grade is below at -1.48%. The benchmark JACI’s YTD return was -0.55%.

Outlook and portfolio performance

Relative value continues to remain in Asia credit both in Investment Grade and High Yield as the macro backdrop in the region is strong but with the acknowledgement COVID developments in EM Asia need to be monitored closely. We remain cautious due to the potential inflation challenges and conversely, COVID developments.

RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) was up 0.38% in the month of May, with gains broadly distributed. The fund remains well-diversified and invested with a net duration of 3.5 years. The cash level stands at 5.2% and we would look to rotate out of cash and tightly traded Investment Grade bonds into new issues or strong BB credits with rating upside and at some time add duration.

 

Source: Nexus Investment Advisors Limited.