Commentaries

12 July 2021

Ashwin Aiyappan, Nevin Nie

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

Markets update

As US Treasuries continue to be rangebound and trend higher, last month focus in pan-Asian credit was on the recent COVID outbreak (the delta variant and the regional differences in trajectory and management) and the Chinese HY property sector. The significance of idiosyncrasies, partially COVID related, continues to rise within pan-Asian credit. As a result, IG broadly performed well last month, with more significant dispersion within HY, the focus of market participants. Indonesia, where the COVID trajectory changed most dramatically, saw its IG and HY bonds underperform on average. As an example, INDON 2030 bonds were 10 bps wider versus Asian IG which was broadly unchanged or tighter in spread.

In HY, the credit stories in focus were China property and Sri Lanka sovereign bonds. To review, from the highs in June to the time of writing in early July, Sri Lanka 2023 bonds dropped 12 points (26% yield currently), as the market absorbed news that Ceylon Petroleum Corporation (“CPC”) had USD 2 bn of loans with local banks that needed to be refinanced negatively. Sri Lanka, which has been challenged by both the reduced tourism receipts and more recently by a delta variant-led COVID outbreak also saw local stress in the swap market. In recent months, Sri Lanka has established new liquidity lines and loans (including India and China) which are likely supportive for near-term maturities but the high foreign currency debt load, poor external and fiscal positions and reluctance to engage the IMF, present significant medium-term challenges. Though, it is a small nation in size and GDP within the region, it does have a large USD bond curve (USD 21.3 bn). Tourism returning will be critical to future economic and external position health but this is an example of our core thesis on the challenges that some Asia EM nations face.

China HY Property spreads widened this month mainly driven by China Evergrande, the top three developer in the country and the most levered, whose bonds were hit after a series of negative headlines. The EVERRE curve front end widened by more than 1,000bps and long end widened 550-900bps. Other single B rated credits were affected by the risk-off mode, with spread widening about 100-200bps. Yet BB-rated credits remain stable with spread moved up not much above 50bps. What lies ahead for the sector depends on whether and how Evergrande can resolve the liquidity crisis. Other property names that were affected by the general selloff starts to offer value.

With regards to performance (JACI), Asia Investment Grade spreads tightened by 7 bps this month, while High Yield spread widened by 62 bps. The spread of Asia HY over IG has decompressed by 67 bps to close at around 524 bps. At month end, Asia High Yield YTD return sat at +1.29% whilst Investment Grade was below at -0.54%. The benchmark JACIs YTD return was -0.12%.

Outlook and portfolio performance

On spread levels, relative value continues to remain in Asia credit both in IG and HY but COVID developments and vaccination levels, in EM Asia, need to be monitored closely. In addition, developments in China policy both in technology and property sector will drive opportunities. We still remain cautious due to the potential inflation challenges and conversely COVID developments.

The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD) fund was up 0.38% in the month of June, with gains broadly distributed. The fund remains well diversified. We remain invested with a net duration of 3.49 years and 3.7% cash level, and we would look to rotate out of cash and tightly traded Investment Grade bonds into new issues or China HY at the appropriate time.

 

Source: Nexus Investment Advisors Limited.