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December 2020

JKC Asia Bond Performance:

In December, the fund (USD unhedged share class) generated a total return of 0.49%. This compares to a return of 0.39% for the benchmark IBXX ADBI Index (Far East closing prices) over the same period, giving a net outperformance of 10bps. In terms of breakdown of the fund’s 49bps NAV performance for the month, 9bps came from price movements, 28ps came from interest carry, 25bps came from exposure to the JKC 2023 fund, and -12bps from management and other fees, giving a gross total return (excluding fees) of 0.61% and a gross relative outperformance vs the benchmark of 22bps. As of the end of December, the portfolio AUM (combined across all share classes) stood at USD64.0m, up USD1.7m from the USD62.3m level at the end November driven by portfolio returns and a 3.1% rise in the EUR (vs the USD) over the month.

The December move took the fund’s (USD unhedged share class) full year net return to 5.25% (or 6.65% on a gross basis) compared to a 6.45% return for the ADBI over the same period. 

Asian USD bond markets eased marginally higher in December as the continued rebound in Asian high yield bonds (15% of the ADBI Index) offset a largely flat performance in IG paper. Although benchmark US Treasuries were generally little changed over the mouth, underperformance at the long end of the UST curve weighed on long duration names. Indeed, the 10yr and 30yr UST bond yields increased +7bps and +8bps respectively, having a negative impact on naturally long duration sectors such as government and quasi-sovereign energy bonds in Asia.  High Yield issues, on the other hand, which have underperformed for much of 2020, continued to play catch up, with Indian and Indonesian commodity bonds leading the gains last month.

Going into the Christmas break it would be easy to blame the Asia’s subdued performance on a lack of news catalysts although macro developments actually continued to be fairly active throughout the month. The COVID-19 virus once again remained the key driver of sentiment although optimism surrounding the global role out of vaccines was partially offset by news of a new more contagious strain of the virus emerging out of the UK combined with a further acceleration of global cases. On the political front, Trump continued his challenge of the November presidential election although financial markets largely ignored this side show focusing instead on negotiations for the second US COVID stimulus package which was eventually signed on December 28th. This helped push US equities to end the year at new record highs as the combination of a dovish Fed and prospects of increased fiscal spending boosted market liquidity. Month end also saw the positive news of a UK-EU trade deal breakthrough averting market fears of UK leaving the EU trade bloc without a deal.

Relief for Europe in avoiding a Brexit no deal scenario, in parallel with further monetary/fiscal stimulus in the US, continued to weigh on the USD which fell 3.1% against the EUR and 0.9% against the CNY in December. This took the USD’s total decline for 2020 (as measured by the DXY) to -6.8%, with recent stabilization of Asia’s EM currencies against the greenback, clearly a factor in the 4Q rally of Asian HY bonds. The recent weakness in the USD has also given room for a moderate easing in monetary conditions in China and although there has been no official change in policy rates, interbank and government bond yields declined in December reversing a tightening trend since May. China like the US ended the year with equities at their ytd high.

Within Asian bonds we saw significant underperformance of sovereign and oil and gas bonds in December. Clearly duration was a large factor here as countries such as Indonesia, Philippines and Korea all have large exposure to the long end of the curve. Adding to this was another poor performance for Sri Lanka which saw S&P finally downgrade the country to CCC+ (following earlier moves from Moody’s and Fitch). For Oil and Gas bonds, in addition to the impact of duration, the sector was also impacted by news that state oil giant CNOOC was among four companies added to the US military sanction blacklist. CNOOC along with its oil services subsidiary COSL account for 2.1% of the ADBI Index and clearly pushed the energy sector lower during the month.

The JKC Asia Bond fund, outperformed the ADBI index by 22bps on a gross basis in December driven by several factors including (1) our slightly short duration bias (2) significant underweight to Sri Lanka and (3) exposure to certain off benchmark names which significantly outperformed in December including RMB China government bonds and the convertible bond issues of LG Display, Evergrande and Khazanah which benefitted from the recent rally in underlying equities. Our holding of Asian HY paper through the JKC Asia Bond 2023 fund, which gained 2.9% in December, also significantly benefitted the portfolio returns last month. The December move took the portfolio’s full year gross outperformance vs the ADBI index to 20bps.

As the EUR continued to rally against the USD in December, we added bonds at the belly of the curve to avoid our duration underweight becoming too large. This included relatively defensive names such as AA rated KDB and HKAA and A rated GUAMET, CCAMCL, ORIEAS and CITLTD.  We continued to look for attractive bonds in the HY space although the strong rally and weaker liquidity over the holiday period limited opportunities. We ended December with an average portfolio yield of 2.63% (vs 2.89% a month ago and vs 2.64% for the ADBI) and an average portfolio duration of 5.29 (vs 5.37 a month ago and vs 5.56 for the index). Portfolio cash at the end of December stood at 4.0% (compared with 3.6% at the end of November).

Outlook

Notwithstanding the potential for another three weeks of potential political volatility in the US ahead of the Biden inauguration on January 20th, we see a more stable geopolitical outlook in 2021. The resolution of the EU/UK trade deal and second US COVID stimulus have removed material market overhangs and although we do not expect US/China relations to suddenly thaw overnight, we forecast a less unpredictable diplomatic relationship between the world’s two largest economies. This more benign geopolitical environment, combined with ongoing dovish monetary policies from most the world’s largest central banks and optimism that the COVID vaccine rollout can bring in an economic recovery later in the year, provides a positive backdrop for risk assets.

Of course, the major offset to this optimism is valuations with global equity and fixed income assets remaining expensive by a historical standpoint. Therefore 2021 will likely be a year when fixed income investors will have to work harder to find value in the market, particularly with so much of the world’s bonds yields in negative territory.  On this basis we think Asia’s USD bond yield premiums which further increased in 2020 vs the US equivalent rated bonds (currently sitting at the wide end of this trading range) continue to provide an attractive investment opportunity for global fixed income investors with flexible mandates. 

From a sector standpoint, we will revisit our plan to add HY exposure in the JKC Asia Bond fund as liquidity improves in early 2021, particularly if, as we expect, new issue volumes pick up in January as they typically do on a seasonal basis.  We also continue to see an attractive prospect in RMB bonds which performed strongly in December but still offer a significantly yield pick up other global markets. 

JKC Asia Bond 2023 Performance:

  • Asian HY bond market ended the year strongly with December seeing a +2.76% gain in the portfolio driven by a risk-on sentiment across global financial assets
  • Indonesia and Indian commodity bonds led the gains as they played catch up from underperformance earlier in the year
  • The portfolio significantly outperformed the overall Asian HY market in the past month as several special situation gains in the fund boosted returns
  • The strong market rally, combined with declining average duration (1.3yrs), saw portfolio yield decline to 8.0% although yield premium of Asian HY bonds (vs other global regions) remains significant and attractive. 

In December 2020, the JKC Asia Bond 2023 fund produced a total return of +2.76%. This return was broken down by +60bps from carry, +224bps from bond price movements and -8bps from fees. The Asian HY market staged a strong rally in December as optimism surrounding the global roll out Covid-19 vaccines and continuation of easy monetary policies in the US and Europe, supported strong demand for global risk assets. Further falls in the USD particularly underpinned positive sentiment towards EM which helped lift Indonesian and Indian credits which had underperformed earlier in the year.

Among the stand out gainers in December was Indian commodities conglomerate, Vedanta, whose bonds surged 5-15 points across the curve following a successful new dollar bond fund raising during the month. Strong demand for the new $1bn 6yr Vedanta deal significantly eased investor concerns regarding the company’s ability to tap liquidity from the bond market to refinance near term maturities. In a similar fashion, the bonds of Indonesian shipping company Soechi Lines (SOCIIJ 23) bonds jumped 10 pts after the company successfully managed to obtain a USD 180m syndicated loan facility, which the company used to finance a tender offer for 61% of its dollar bond existing issue.

The Chinese HY market also had a positive month as Chinese real estate bonds advanced (including bellwether Evergrande which saw its curve gain ~2.5pts in December) on the back of reduced refinancing fears as the sector continued to demonstrate strong contract sales performance right up to year end. Meanwhile Chinese oil services company Hilong (HILOHO 22) bonds gained 20pts as a restructuring proposal for both its 2020 and 2022 issues was viewed as investor friendly. However, the best performer in China was lithium-compounds producer, Tianqi Lithium (TIANQI 22) which gained a massive 39 points after the company announced it had struck an accord with its lending banks to extend the maturity of its USD1.88bn syndicated loan following a major asset sale in Australia. Tianqi bonds which had been trading at distressed levels was further boosted by news it had paid its USD bond coupon in late November. 

For the 2023 portfolio we saw strong outperformance vs the overall Asian HY market as our exposure to the special situations highlighted above significantly boosted returns in addition to the fund befitting from our general overweight positioning in Indonesian and Indian sectors, which led the market’s gains in December. Our lack of exposure to Sri Lanka, which was once again the HY market’s biggest underperformer in December, further supported our relative performance. Indeed, although the fund is not officially benchmarked, the 2.76% monthly return outperformed the Asian HY (Markit AHBI) Index by 82bps net (90bps gross) for the month. The December gain took the fund’s full year return to 4.7%.

In terms of trading we saw further inflows into the fund in December and deployed the additional liquidity in a diversified manner largely topping up our existing positions balancing exposure to both China and non-China names. We ended the month with an average portfolio yield of ~8.00% and average duration of approximately 1.3. The recent market rally and declining duration of the fund on account of our fixed maturity structure, has seen the average yield of the portfolio come down in recent weeks. Nevertheless Asian HY bonds still offer a significant yield premium over similarly rated issues in other market regions and therefore present a compelling investment story, particularly as the low duration of the fund should insulate investor from interest rate risk in 2021. The portfolio ended the month with 146 line items across 123 separate issuers.

Outlook for Asian HY 2021

In our view the Asian HY market should continue to deliver strong return potential in 2021 as EM markets are well positioned to benefit from easy global monetary policy and weaker USD combined with the prospect of an international economic recovery as vaccine rollouts should begin to stabilize the COVID-19 virus and allow most economic regions to return to normal operating conditions.

Perhaps the two biggest market risks in the medium term are the currently elevated asset price valuations in global fixed income and equity markets and concerns of an unexpected rise in interest rates if the post COVID economic recovery sparks a faster than expected spike in inflation. In this regard, we believe the JKC Asia Bond 2023 portfolio is well positioned given its short average duration provides a low interest rate exposure while the significant yield premium of Asian USD bonds (vs similarly rated US HY issues), which remains at the wide end of the historical range, should provide a significant buffer against any unexpected  global asset repricing.

At a sector level, Chinese property bonds should remain a key market driver as we expect property developers will continue to dominate the Asian HY primary market in early 2021 and hence will stay the most liquid segment in the region. Consequently a close and ongoing observation of policy developments in Chinese real estate will remain essential although we believe new regulations introduced in late 2020 should provide a more predictable and less volatile environment for the sector going forward.

Outside of China, we believe the ultimate recovery from COVID should also benefit bond supply in other regions which has suffered a hiatus in 2020 on account of the global economic slowdown. Non-China corporates are expected to have better visibility on demand and operations in 2021 and thus, will be able to assess their capex/investment plans that were previously put on hold. Increased new issue diversification remains essential to the healthy development of the Asian HY bond market and we are optimistic the year ahead should bring exciting new investment opportunities in this regard. 

The information and material provided herein do not in any case represent advice, offer, sollicitation or recommendation to invest in specific investments. 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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