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August 2020

JKC Asia Bond Performance:

In August, the fund (USD unhedged share class) generated a total return of +0.11%. This compares to a return of +0.17% for the benchmark IBXX ADBI Index (Far East closing prices) over the same period, giving a net underperformance of -6bps. In terms of breakdown of the fund’s +11bps NAV performance for the month, -24bps came from price movements, +28ps came from interest carry, +19bps came from exposure to the JKC 2023 fund, and -12bps from management and other fees, giving a gross total return (excluding fees) of +0.23% and a gross relative outperformance vs the benchmark  of +6bps. As of the end of August, the portfolio AUM (combined across all share classes) stood at USD62.1m, a decrease from the USD64.3m level at the end July, as positive gains in bond prices and a 1.3% gain in the EUR vs the USD during the month was offset by fund cash flows. 

Asian IG bonds achieved a broadly flat performance in August as further tightening of credit spreads in the region, was offset by a reversal in US Treasury market, which saw the long end of the yield curve sell off towards month-end. The main driver of US Treasury bond weakness was clearly inflation expectations which climbed after the FOMC suggested, and later confirmed, a shift in policy towards long term inflation goals. At the 2020 Jackson Hole Symposium on August 27th , Fed chair Powell stated the  central bank would tolerate inflation moving “moderately” above its long held 2% target. The market concluded this would suggest a prolonged extension of the current zero interest rate policy and potential for further QE  to boost inflation in the medium term given the sluggish post COVID economic recovery in the US.

Understandably the US yield curve steepened on the back of higher inflation expectations however uncertainty remains as to how the Fed would actually succeed in its goal, given the failure of many other central banks to successfully ignite inflation through monetary policy alone in the past decade. As a consequence, the selloff of US Treasury long bonds remained quite muted with the 10yr treasury yield initially selling off 10bps following the announcement but subsequently retracing half of that move closing the month at 0.71%. Meanwhile, the signal of a dovish Fed was welcomed by risk asset investors with US equities and HY credit seeing further gains in August. Indeed both the NASDAQ and S&P Indices hit all-time record highs during the month.

In Asia, this risk-on tone largely supported HY bonds which significantly outperformed their IG counterparts.  Further weakness of the USD in August also underpinned EM sentiment as Asian frontier markets such as Sri Lanka, Pakistan and Mongolia continued to outperform. Indeed, the Sri Lanka market saw its third straight month as Asia’s  best performing sector. News of a landslide election victory in Sri Lanka for the president’s Podujana Peramuna party further boosted sentiment for the country. Indonesian sovereign bonds, in contrast, normally a big beneficiary of USD weakness, lagged on account of the long duration exposure to falling UST’s. Malaysia, Philippines and Thailand markets also saw negative returns in August given their high weighting to long duration bonds

Chinese dollar bonds ended the month flat as continued negative headlines on the geopolitical front did little to impact sentiment and credit spreads continued to tighten to offset the UST move. The Trump administration continued to inflict trade pressure on Chinese corporates through threatened sanitations and tariffs although the low US investor exposure to these issuers resulted in little impact on bond valuations. On the contrary, we continued to see foreign investors raise their exposure on the Chinese domestic bond market as the yield differential between RMB and USD denominated bonds kept demand elevated for Chinese sovereign and policy bank issuers. We further increased our portfolio’s exposure to RMB bonds in August attracted to the high yield and positive outlook on the RMB.

For the Asian dollar market, overall new issuance declined on a sequential basis in August however with over USD20bn of new bonds raised during the month that still remained a high number for the typically low summer season, indicating appetite for Asian credit continues to be robust.

The JKC Asia bond fund outperformed the ADBI index in August despite our regulatory underweight in Sri Lanka and Pakistan, which as the best performing markets in Asia continued to cost us on relative performance. This outperformance was largely on account of some strong gains of our high yield exposures, particularly SME corporates in Indonesia and India which staged a strong rebound in the month. Our short duration bias also benefitted moderately from the steepening yield curve at month end. 

We ended August with an average portfolio yield of 2.89% (vs 3.20% a month ago and vs 2.72% for the ADBI) and an average portfolio duration of 5.26 (vs 5.43 a month ago and vs 5.49 for the index). Portfolio cash at the end of July stood at 5.6% (compared with 4.8% at the end of July).

Outlook

In August we further trimmed our duration weighting vs the benchmark to accommodate the potential for rising inflation and resulting  steepening of the yield curve. That said we continue to keep our duration exposures liquid and nimble, mainly through US Treasury bond  positions, given the significant uncertainty overhanging the post COVID economic recovery. The upcoming US election is also likely to keep headline risk high and underpin elevated volatility in the market. Nevertheless, we maintain our more constructive view on Asian credit given the recent shift in Fed policy and the fact the Asian market still remains historically cheap on a relative value basis. We will therefore look for a potential increase our risk exposure though reducing our cash weighting and mainly targeting attractively priced short duration BBB rated names or high quality BB rated issuers. We continue to favour the new issue market as the main avenue to pick up new names.

In recent months we have also been increasing our weighting to convertible bonds in Asia and have benefited from some recent strong gains in names such as LGPHIL 24 and KNBZMK 23. We will continue to look for more opportunities in this space although we prefer balanced names that can still provide some positive yield returns in the event equity markets make a sudden correction. 

 
JKC Asia Bond 2023 – Performance
  • Asian USD HY Bond market tone remained risk-on for the month of August on the backdrop of a dovish Fed policy

  • China HY Property had a constructive month as 1H20 results show tangible recovery in contracted sales since the COVID-19 outbreak

  • Positive single name price moves in ASRIIJ, VEDLN on the back of positive headlines.

  • HY primary markets remained busy in August, despite the typically thinner summer season, dominated by China property issuances mostly via repeat issuers.

  • Strong inflows into Asian credit has provided strong technicals which is best reflected by the large order book sizes in primary deals and subsequent tightening on Initial Price Guidance (IPT)

  • The JKC Asia Bond 2023 fund ended August with an average yield of 10.6% while duration continued to come down (currently 1.75 years), issuer line items increased to 127 (across 136 positions).

  • Despite Given the strong monthly performance, Asian yield premium (vs US) declined slightly in August but remain well above historical average, providing a good opportunity for investors to still capitalize on market recovery

In August 2020, the JKC Asia Bond 2023 fund produced a total return of +2.43%. This return was broken down by +60bps from carry, +191bps from bond price movements and -8bps from fees. The Asian HY market had a strong month of August as both macro and micro factors married together to bring a risk-on tone for the market. On the macro front, speculation ahead of the virtual Jackson Hole conference of a potential dovish shift in Fed policy provided a benign technical environment for all risk assets and Asian HY markets followed suit.

Whilst companies are still announcing their first half results, the Chinese HY Property sector appear to be leading the recovery as the sector continued to post strong sales figures in the month of July. According to independent research agency CRIC, the top 100 Chinese developers reported July contracted sales with 24.8% yoy increase compared to 12.2% YoY and 13.8% YoY increase in May and June respectively. On the policy front, it was reported by Bloomberg that Chinese onshore bond regulator, NAFMII would consider window guidance to tighten new quotas applied by property companies after August 10th to within 85% of the upcoming respective onshore bond maturities. Based on discussions with developers, many believe the policy focus is a healthy development as companies continue to tangibly de-lever their balance sheets which is long term credit positive in our view. 

Away from China, we had a host of positive single name news which was able to drive bond prices up and deliver alpha to the portfolio. Indonesian property developer, ASRIIJ bonds jumped more than 20 pts as news emerged that the company mandated JP Morgan and UBS to run an exchange offer for both its USD bonds for which it obtained shareholder approval to issue new notes. Earlier this month, S&P downgraded the developer to CCC- from CCC+, citing risk of a distressed exchange and heightened refinancing risk but the exchange offer, which is unlikely to be a distressed one, once completed will certainly be credit positive.

Indian oil and gas producer and mining conglomerate VEDLN’s bonds continued to soar, up more than 10pts over the month, as the company completed the new USD 1.4bn bond issuance which is a crucial step in the road to privatizing its Indian listco, Vedanta Limited. With the new proceeds from the new bond deal and the USD 1.75bn bank facility, investors are turning their focus on the equity transaction and the delisting price which would ultimately determine how much debt the post privatized company would need to take on. Whilst this is a positive direction for the company, we continue to monitor the situation carefully.

The Asian HY primary markets remained busy this month even in what is typically a thinner supply pipeline in August with the bulk of the issuance coming from Chinese property with names like REDPRO and FTHDGR. Despite the heightened supply, technicals remained firm as order book sizes remained large inducing many new issuers to tighten by at least 50 bps on the initial price targets (IPT). One explanation for the benign technical environment might be attributed to the strong inflows Asia credit has been experiencing over the past 2 months. According to Barclays research, EM hard-currency bond funds experienced about 4bn in net inflows since the beginning of July.

For the 2023 portfolio, we continued to add to positions in Aug as the EUR continued to rally which increased our portfolio cash on account of share class currency hedging. We took the opportunity to increase exposure into China HY Property through ZHLGHD and GRNLGR. In addition, we added a new line items including Chinese real estate agency EHOUSE, and Indian auto parts company MSSIN. We ended the month with an average portfolio yield on the portfolio of ~10.6% and an average duration of approximately 1.7years.  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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