The Two “I”s

10 October 2018

David Fung

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


Asian credit performance in September was muted with spread tightening offset by a higher UST yield. The benchmark JACI was down -12bps for the month and -1.41% YTD. HY (+48bps) outperformed IG (-36bps) during the month as it was less impacted by rising risk-free rate. Meanwhile, concerns on a faster rate hike roadmap were temporarily relieved after the Fed kept its dot-chart unchanged in its FOMC meeting. On the other hand, trade war tensions between China and the U.S. got worse after the U.S. had introduced a 10% tariff on $200bn of Chinese imports during September and the Chinese cancelled a proposal meeting with their counterparts, citing that “it won’t negotiate when there is a knife to its throat”. With that backdrop Asian credit’s performance lagged behind the rest of the EM – Latam’s credit spread tightened around 44bps, EMEA was 52bps whilst Asia just tightened 6bps during the month. 

On the currency front, despite the Turkish Lira rebounding ~7% against the US$ last month, its Asian counterparts did not share the same joy. IDR and INR, two current account deficit countries, lost another 1.3% and 2.1% against the US$ respectively. This coincided with a rising crude oil PX and a rate hike by the Fed. Given both countries will approach its presidential / general election in 2019, there is little room to cut their fiscal deficits. Therefore, Indon and India will remain under the spotlight in the near term given their high sensitivity to both oil prices and dollar. Specifically for India, the country not only suffered from external macro challenges but also huge internal pressures. Its financial system was put to the test after the infrastructure and financial services giant IL&FS Ltd, defaulted some of its short term obligations. The Reserve Bank of India took a decisive step to take over the debt laden entity on the 1 Oct, replacing the entire management team and issuing a public statement which aimed to placate the market. We believe this is a critical step for the Indian Gov’t to restore financial stability given IL&FS has been regarded as “too big to fail” and a systemic important financial institution. We will continue to monitor the event and its implications to other Indian credits.  

Outside Asia, JP Morgan revised its selection criteria for Emerging Market Bond Index (EMBI). As expected, Middle East countries include Saudi Arabia, Qatar, UAE, Bahrain and Kuwait will become eligible for inclusion staring in Jan 2019. The change will result in the risk weight for Asia to drop to 18% from 20%, and Latam to drop to 33% from 37%. Within Asia, we expect Indon sovereign will be impacted the most (similar yield with a lower rating versus MENA comp). 

In terms of performance, our RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class B USD - net of fees) was down -76bps in September and -3.26% YTD. Our underperformance was largely attributed to the mark-to-market loss of one Indian position related to the IL&FS saga. Following the Indian Gov’t’s decision to provide liquidity support to IL&FS (a de-facto bail-out), we’ve recouped a large portion of such losses and we remain hopeful that this will turn into a profitable position. Meanwhile, we continue to tactically OW Developed Asia (Korea, Singapore, HK) and GCC sovereign (risk-adjusted reward remains attractive in the near term due to EMBI inclusion + higher oil price). China, being the epicenter of the trade war and dominant in new supply, will mainly be a carry play. We also maintain our UW in Indon/India/Frontier due to the reasons mentioned above. 

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