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November 2020

JKC Asia Bond Performance:

 

In November, the fund (USD unhedged share class) generated a total return of 1.18%. This compares to a return of 1.21% for the benchmark IBXX ADBI Index (Far East closing prices) over the same period, giving a net underperformance of 3bps. In terms of breakdown of the fund’s 118bps NAV performance for the month, 91bps came from price movements, 28ps came from interest carry, 11bps came from exposure to the JKC 2023 fund, and -12bps from management and other fees, giving a gross total return (excluding fees) of 1.30% and a gross relative outperformance vs the benchmark  of 9bps. As of the end of November, the portfolio AUM (combined across all share classes) stood at USD62.3m, up USD2.2m from the USD60.1m level at the end October driven by portfolio returns and a 2.4% rise in the EUR (vs the USD) over the month.

Asian USD bond markets saw strong performance in November as stable US Treasury yields and positive news regarding COVID vaccine development underpinned improving credit market sentiment throughout the month. Meanwhile, the US presidential election played out largely in line with expectations with an ultimately comfortable victory for Biden and, although results were delayed on account of the large proportion of mail-in ballots, markets did not suffer a previously feared volatility spike driven by election uncertainty. One surprise was that, despite Biden’s strong electoral college performance, in the House and Senate elections the democrat party did much worse than pre-election poll forecasts had suggested, significantly diminishing expectations of an executive/legislature clean sweep, which now hangs on a runoff vote in Georgia. A republican senate and consequential political deadlock, would significantly curtail Biden plans for a large scale fiscal stimulus early next year. As the result of this the long end of the US Treasury curve remained range bound during the month with the 10 yr UST yield ending the month at 0.84% largely unchanged from October.

Euphoria of election clarity was further supported by a flow of headlines regarding breakthroughs on COVID vaccine development and although global case levels continued to rise sharply higher and lockdowns in US and Europe were reintroduced, news of impressively high efficacy from several new vaccines provided a powerful offset to the market. Global equities rallied throughout the month, the Dow Jones crossing the psychological 30,000 level for the first time in its history. Asian equity markets were similarly strong providing a strong uplift for both IG and HY credit markets in the region. Continued weakness of the USD meanwhile supported EM markets such as India, Sri Lanka and ASEAN countries which all outperformed  in the region.

China on the other hand was a significant laggard in November with both equity and credit markets materially underperforming other parts of Asia and the rest of the world. This partially could be ascribed to rotation selling as China had been the biggest outperformer during most of 2020 and hence signs of an end to the COVID crisis brought profit taking and investor shifts into laggard markets. However there were also several negative headlines which exacerbated China’s underperformance during the month.

As domestic interbank rates show, China has significantly tightened monetary conditions in recent months and although a formal rate rise is not imminently expected, we continued to see an increase in RMB bond yields which clearly weighs on Chinese USD bond market demand from domestic investors. Meanwhile, a couple of defaults in the onshore bond market from certain state owned enterprises partially hurt market sentiment towards certain weaker government linked issuers, particularly LGFV bonds, which were significant underperformers in November. Finally signs that, despite his election loss, president Trump would not relax economic pressure on China also raised fears of further aggressive policy action before the end of his term in January next year. Specifically the White House announced an executive order in mid-November to ban US investors from holding stock or bonds in certain large Chinese corporates deemed by the US to be linked to the Chinese military. Although these companies only account for ~4% of the ADBI Index and given their strong standalone credit profiles would be expected to see buying demand from non-US investors, the news still raised market volatility as traders tried to position ahead of this potential forced selling while speculation increased of other companies potentially being added to the list.  Some names particularly affected by this development included state chemical company China National Chemical (HAOHUA, CNBG), and state oil companies CNOOC and China Offshore Services (CNOOC and COSL).

For our JKC Asia Bond fund, an underweight exposure to both the China LGFV sector and Chinese companies included in the US sanction list helped drive our gross outperformance vs the ADBI benchmark in November. Indeed China was our best performing sector for relative performance of the fund in November as we also benefitted from our holdings in RMB domestic sovereign bonds which, despite the rising onshore yields, were significantly helped by a further 1.7% gain in the RMB vs the USD in the month. Admittedly a 17% rally in Sri Lankan sovereign bonds did hurt the fund’s relative performance to an extent we hold a large underweight to this name although this was more than offset by our exposure to Indonesia HY bonds which saw strong gains in the month.

Given the 2.4% rise in the EUR vs the USD in the month, we added some longer dated Philippines sovereign and CK Hutchison bonds to reduce our duration underweight vs the benchmark. We also added some longer dated HY bonds such as MEDCIJ 27 to reinvest maturing positions. We ended November with an average portfolio yield of 2.89% (vs 3.15% a month ago and vs 2.73% for the ADBI) and an average portfolio duration of 5.37 (vs 5.25 a month ago and vs 5.61 for the index). Portfolio cash at the end of November stood at 3.6% (compared with 3.8% at the end of October).

Outlook

As we approach year end, we typically expect market activity to slow down although several important issues remain worthy of vigilant monitoring. Since the Biden election victory and news of new COVID vaccine breakthroughs there has been a clear recovery in Asian HY credit. Expectations of a more benign political environment combined with a continued loose monetary policy in US and Europe provides a good basis for HY risk taking, particularly if a successful vaccine provides an economic growth uplift early next year. December is often a month Asian investors take a defensive stance to take profits and protect their year-to-date returns, however given the significant underperformance of HY vs IG in 2020 we expect less selling pressure this year. On this basis we will continue to look for attractive opportunities in the HY space to position the portfolio for next year’s expected economic rebound.

In contrast, we believe Asian IG may be vulnerable to political driven volatility in the near term given the Trump administration’s efforts to introduce sanctions on Chinese SOE’s which are typically BBB and A rated issuers. As we stated, we do not think this will have a meaningful impact on credit fundamentals but could still drive a period of short term technical weakness. Over the longer term we also see some risk of a pickup in inflation if the global economic rebound picks up in an era of dovish monetary policy. On this basis we will maintain our slightly short duration positioning in IG and in the near term will use any currency driven trading to rotate into non-China exposure which faces lower imminent political risk. 

JKC Asia Bond 2023 – Performance
  • Strong gains for Asian HY bonds in November as a positive risk-on sentiment drives global asset prices
  • Asian USD HY market gains were mostly driven by non-China names (particularly Indonesia and India) as China lagged due to rotational profit taking and softer investment sentiment onshore
  • Chinese SOE and LGFV sectors particularly underperformed on the back of negative news regarding a couple of onshore bond defaults
  • Meanwhile exchange and tender offers continued to bring positive idiosyncratic upside to the portfolio
  • The JKC Asia Bond 2023 fund ended November with an average yield of 9.3%while duration continued to come down (currently 1.5 years), issuer line items ended the month at 123 (across 142 individual positions)
  • Asian yield premium (vs US) in November remained well above historical average, providing a good opportunity for investors to still capitalize on market recovery

In November 2020, the JKC Asia Bond 2023 fund produced a total return of +1.58%. This return was broken down by +57bps from carry, +109bps from bond price movements and -8bps from fees. While November saw several constructive macro developments including COVID vaccine breakthroughs and a US presidential election that came broadly in line with expectations, the overall strong performance of Asian HY markets was also driven by positive fund inflows into emerging markets from foreign investors. As a result, we saw a significant outperformance from Indonesian and Indian HY credits, particularly in those sectors which had been underperformers earlier in the year. Among these gainers were Indonesian tire-maker GJTLIJ 22s (up +8 points), Indonesian property developer ASRIIJ 22s (up +11 points), Indonesian contract mining company DOIDIJ 22 (up +7 points) and Indian finance company Indian Infoline IIFOIN 23 (up +6 points)

In contrast, Chinese HY credits were more mixed and generally underperformed the rest of Asia in November with property developers trading flat during the month while industrial issuers saw divergent moves driven by idiosyncratic news flow.  Oil and gas service companies did see strong gains as sentiment improved in the energy sector on the back of COVID recovery optimism while stressed undersea contract company, Hilong (HILOHO 22) gained 7pts after speculation that management and bondholders were approaching a breakthrough on debt restructuring talks. However, these gains were offset by some downward moves in the Chinese SOE (state owned enterprise) and LGFV (local government) sectors which significantly underperformed on the back of domestic investor selling. Specifically weighing on government linked bonds were reports that a  Henan-owned SOE, Yongcheng Coal & Electricity Group, had missed payment on CNY 1bn of onshore notes while state owned, Huachen Automotive Group Holdings, was also late on a redemption of one of its CNY 1bn bonds. These back-to-back defaults raised concerns of a softening of government support for certain segments of the SOE sector and consequently we saw some higher levered LGFV’s (although unrelated to the defaulting entities) trade lower adding to the broad based underperformance for the whole SOE complex. Admittedly, the market did stabilize toward month end after reports of some government led asset injections into certain poorer performing SOE’s and LGFV’s, although we expect the sector to remain volatile in the medium term.

Elsewhere, Chinese property developers generally traded in a tight range this month. Recent laggards such as EVERRE and GZRFPR recovered after underperforming significantly in October with the GZFRPR curve up about 2 points this month after announcing several asset sales to calm investor leverage concerns. Meanwhile, Evergrande was reported to have completed a deal with strategic investors regarding a $6bn stake in their onshore entity, Hengda, suggesting that concerns over the subsidiary’s repayment risk has been reduced. However, the negative moves in SOE’s weighed on government linked property developers such as Greenland (GRNLGR) and China Fortune Land (CHOFTN), limiting the sector’s overall performance.

For the 2023 portfolio, a combination of some unexpected early bond tenders and redemptions, combined with material inflows into the fund left us a buyer of new paper. We took advantage of this liquidity to scale up our positions in some Chinese property developer laggards such as the RONXIN 23s and SINHLD 21s. In addition, we looked to increase diversification and add exposure to new names including Indian pharmaceutical company GNPIN 21, Chinese water utility CWAHK 22, Chinese property developer DEXIN 22, and pan Asian commercial property landlord ESRCAY 22, which increased line items in the portfolio to 142 across 123 issuers. We ended the month with an average portfolio yield on the portfolio of ~9.3% and an average duration of approximately 1.5years.  Given the yield premium of Asian HY (compared to equivalently rated US HY bonds) continues to remain at elevated levels, particularly for single-B rated issues, Asian HY bonds still offer good upside potential despite the recent rebound in our view.

The information contained herein is issued by JK Capital Management Limited. To the best of its  knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report. Under no circumstances should this information or any part of it be copied, reproduced or redistributed.

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