Range-bound markets & uncertain macro

9 August 2019

Ani Deshmukh

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

Market Commentary

July was characterized by range-bound markets in Asia, helped by a stable UST curve. 10-yr treasury yields remained in the 2% - 2.1% range, and ended the month unchanged from end-June, as the FOMC decision on July 31st was awaited. The much-anticipated Trump-Xi meeting at the G20 resulted in modestly positive headlines as the two countries agreed to resume discussions, leading to some optimism in markets. However, China’s slower than expected pace of agricultural imports resulted in the trade truce ending quickly, with Trump announcing additional tariffs. Heightened Iran concerns due to skirmishes with the U.S. as well as the UK and the Japan-South Korea trade spat all contributed to an uncertain outlook. July saw high yield bonds largely unchanged, and IG spreads tighter by about 2-3bps.

Economic activity in Asia is likely to remain subdued, as tariffs are likely to slow the export-oriented economies in the coming months. Lower rates are a support factor with regional Central Banks keen on matching pace. However, Chinese domestic liquidity remains tight as the country looks at targeted easing to avoid asset bubbles, especially in real estate. U.S. rates are likely to see another 25bps cut by end-2019, and borrowers in our space are likely to benefit from lower borrowing costs. High Yield bonds need careful screening, but we expect limited stress in the current issuer space apart from a few weaker outliers. Finally, even though growth may slow down, we are coming off a high base in 2018 as can be seen in the chart below, and regional economies continue to post reasonable headline numbers. As always, stronger corporates will benefit and offer good risk-adjusted returns for the portfolio.

Portfolio Commentary

The Fund’s underweighting in China as well our exposure to the MENA region and Japan were the primary drivers of outperformance over the month. Duration was 4.3 years as at end-July, which we plan to reduce to about 4 years over the coming months. As UST yields drop, we still like duration, but do not expect to see multiple cuts by the Fed from this point onwards. The Fund remains IG focused with 74% exposure to benchmark Investment Grade names, which will continue to be the focus in the near term.

 Real GDP

Source: HSBC Asia Research

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