A safe harbor during a stormy period

17 September 2018

Ani Deshmukh

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


The headwinds for Emerging Markets showed no sign of slowing down and made this summer unusually long and painful for many investors. Trade wars between the US and China is now official and no longer staying at the bluffing and negotiating phase. It is highly likely that things will get worse before they get better given the tariff of another US$200bn of goods could be implemented as soon as early September. Its related impact on corporate earnings, inflation and economic growth will surface in the next couple of months and will be under market scrutiny. Meanwhile, a stronger US$ continued to create turbulence in fundamentally weaker EM countries like Argentina and Turkey, forcing their currencies to devalue sharply again. At the time of writing this commentary, Argentina’s Central Bank just hiked its key policy rate to a whopping 60% (the highest in the world) in an effort to halt a sharp slide in the peso. This is a cautionary fairy tale for EM as Argentina literally completed its debt restructuring just two years ago and it might have to do so again in the near future. Yet, Asian credit showed its stability amid all these negative headlines. The benchmark JACI remarkably sustained its recovery and delivered +51bps return in August, of which Asian IG outperforming Asian HY by a significant amount (+66bps return vs +1bp return). 

How did Asia do it? The answer is very simple. With over 50% of JACI now comprised of Chinese credits, when China holds up, the JACI would hold up. Following a reversal of the PBOC policy in late July (from tightening to easing, allowing banks to use MLF proceeds to buy corporate bonds, reducing banks’ capital provision on bond purchase etc), Chinese credits experienced a strong rebound from their July low. That also narrowed YTD losses in Chinese credits to just -1.20%. Meanwhile, a good portion of Asia is consisted of developed countries like Singapore, HK, and Korea. Their credits were benefited by the flight for quality during volatile periods, which explained why Asian IG outperformed Asian HY by such a big margin. The underperformers of the region included Pakistan (-2.52% in August) and Sri Lanka (-1.27% in August) as these two frontier countries are more correlated to the rest of EM. However, these two countries only accounted for 1.65% of the JACI; hence, their decline had a limited impact on the overall JACI performance.

At the beginning of this year, projected total supply in Asian US$ credit could reach US$280bn for the entire 2018. As of the end of August, roughly half of the budget were met. That means we may well see as much as US$140bn (or US$35bn per month) of new supply flooding the market during the remaining four months of this year. When market sentiment is weak and investors are wary about EM woes, whether the supply could be fully absorbed without repricing is questionable. Meanwhile, issuers would tend to be a lot more sensible in pricing during this kind of environment, so we do expect some interesting opportunities especially in the higher BB/low BBB space. 

Our RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund achieved +11bps* return in August and -2.52% YTD. Our underperformance against the Index mainly came from our lower portfolio duration (2.93 vs 4.9 yr) so we made less when UST yield came off during the risk-off period. In addition, we also suffered a temporarily marked down in one of our Indian HY positions which we expect losses could be recouped once the pending rights offering is completed. In terms of our positioning, we continue to stay MW in China, OW developed Asia and UW Indon and Frontier countries. Ultimately, we don’t expect Asia to follow Argentina and Turkey but at the same time, we don’t want to be aggressive too early.

Nexus Investment Advisors Limited, subject to the supervision of the Securities and Futures Commission (SFC) in Hong Kong, has been appointed by the fund's management company as investment manager to RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund.

*Sources : Nexus Investment Advisors Limited