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February 2021

JKC Asia Bond Performance:

In February, the fund (USD unhedged share class) generated a total return of -1.09%. This compares to a return of -1.36% for the benchmark IBXX ADBI Index (Far East closing prices) over the same period, giving a net outperformance of +27bps. In terms of breakdown of the fund’s -109bps NAV performance for the month, -124bps came from price movements, +25ps came from interest carry, +1bps came from exposure to the JKC 2023 fund, and -11bps from management and other fees, giving a gross total return (excluding fees) of -0.98% and a gross relative outperformance vs the benchmark of 38bps. As of the end of February, the portfolio AUM (combined across all share classes) stood at USD62.6m, down USD0.8m from the USD63.4m level at the end January driven by the combination of negative bond returns and a marginal decline in the EUR (vs the USD) over the month.

It was a soft month for Asian USD bonds in February as a sharp steepening of the US Treasury bond yield curve pushed cash prices lower, particularly for long duration paper. While investment Grade spreads did remain largely stable throughout the month and high yield debt saw modest gains, this was not sufficient to offset the underlying curve weakness. The US Government 10 year bond ended the month yielding 1.41% an increase of 34bps compared with the level at the end of January, hitting a 1 year high of 1.53% intra-month. Given short term rates remained unchanged, this increase was almost fully on account of curve steepening with long duration bonds particularly underperforming. In fact, the 2yr to 30yr yield spread of 210bps has reached its highest premium since 2015 in the past week.

Undoubtedly, inflation concerns has been the main catalyst of the recent curve move with CRB food and industrial metal price indices spiking during the month, hitting multi-year highs in both cases. Similarly energy prices, as indicated by the Brent crude oil price, jumped 20% in February returning to pre-COVID levels. Given these commodity price gains appear to be largely fueled by global inventory restocking as western consumers see greater optimism of a post COVID economic rebound, the sustainability of this trend likely remains highly dependent on the success of global vaccine rollouts and suppression of new virus infections. However, while the timing of this virus progression may remain uncertain, clearly less ambiguous is central bank reaction to the latest moves as Fed Chairman Powell on February 24th reiterated his intention to maintain loose monetary policy and QE support for market liquidity. This, in combination with President Joe Biden’s aggressive push of his fiscal agenda, should keep current positive growth drivers in place and corresponding pressure on both the UST and USD markets in the near term.

Within Asian IG bond markets, relative performance last month largely  reflected duration as long maturity sectors such as Indonesia/Philippines sovereigns, Malaysian/Thai Energy companies and Chinese internet names all saw the biggest declines. Perhaps the one exception was Chinese state oil company CNOOC which helped by the positive oil price move saw a strong rebound in its bonds after weakness in Dec and Jan following the US investment ban. High Yield Bonds outperformed IG although relative performance within HY was mixed as Pakistan, Mongolia and India/Indonesia commodity companies all outperformed while perennial high beta play, Sri Lanka, was once again the biggest drag on the market. Meanwhile within China HY the dominant property sector ended the month broadly flat as high coupon gains across the sector was offset by weakness in a handful of names such as Greenland (GRNLGR), Sichuan Languang  (LGUANG) and Rise Sun (Rissun) which experienced softening investor sentiment following the China Fortune Land (CHFOTN) default.

The JKC Asia Bond Portfolio saw strong relative performance in February outperforming the benchmark index by 38bps on a gross basis or 27bps net. Admittedly part of this relative move was on account of a mean reversion of pricing mismatches at the end of January which, as we previously commented, negatively affected the fund returns in the previous month. However even stripping this out effect, the fund still strongly outperformed in February mainly on account of our overall short duration positioning, underweight of Sri Lanka and avoidance of any significant idiosyncratic negative impacts. We also enjoyed some strong gains from off-benchmark positions in the portfolio, particularly holdings in CB’s and callable perpetual bonds. On a year-to-date basis, the fund has outperformed the ADBI index by 6bps on a net basis (or by 29bps gross of fees).

Given the largely stable EUR performance in February, and quiet markets on account of the Chinese new year holiday which saw new issue volumes fall sharply, trading activity on the fund was largely muted. That said, we did engage in some rotation switching out of carbon intensive regional power utilities into quasi sovereigns and diversified conglomerates. We ended February with an average portfolio yield of 2.61% (vs 2.68% a month ago and vs 2.78% for the ADBI) and an average portfolio duration of 5.17 (vs 5.32 a month ago and vs 5.50 for the index). Portfolio cash at the end of February stood at 6.0% (compared with 3.3% at the end of January).

Outlook

In terms of macro fundamentals, the next major focus for the Asian bond market will be corporate earnings season as most regional companies (with the exception of India) report their full year results in March. 2H20 results will give a strong indication on the level of recovery Asian corporates achieved after regional economies reopened following the 1H20 COVID lockdown and whether the strong macro numbers translated into similarly strong performance at the micro level. Separately, for the China property sector it will also be the first chance to observe progress made in improving balance sheets after the introduction of the ‘three red lines’ leverage policy last year.

Meanwhile, inflation numbers both in and out of Asia will need to be closely observed in March to see the extent recent commodity price spikes have translated into CPI and  PPI reports while, as always, COVID case numbers and vaccine rollout progress will be key to predicting the sustainability of this recent sentiment driven rally. Given the FOMC’s apparent lack of urgency in containing inflation we will maintain our short duration bias on the JKC Asia Bond portfolio for the time being.

Typically after Chinese new year, the Asian USD bond market sees a significant pick up in new issue volumes, however given the recent sharp increase in long dated treasury yields, this has clearly negatively weighed on issuer sentiment and supply has so far remained lackluster over this  period. The longer this continues this may have a corresponding effect on the market as investor demand for a smaller availability pool of new paper should positively impact credit spreads. In our view this should remain favorable for risk positioning down the credit curve, albeit remaining in short duration exposures. 

JKC Asia Bond 2023 – Performance
  • Flat month for Asian HY bonds, significantly outperforming the rest bond market as recent UST curve steepening weighs on longer duration fixed income assets
  • Asian HY market technicals continued to be buoyed by foreign investor demand as well as muted primary issuance during Chinese New Year Holidays
  • China HY property asset class slightly underperformed in February as volatility picked up following CHFOTN weakness
  • Indian and Indonesian resource companies however provided an offset as recent commodity price gains supported market sentiment
  • The JKC Asia Bond 2023 fund ended February with an average yield of 8.6%,average duration of 1.3yrs and average rating of BB-
  • Fund diversification stood at 162 positions across 125 issuers.

In February 2021, the JKC Asia Bond 2023 fund produced a total return of +0.03%. This return was broken down by +45bps from carry, -34bps from bond price movements and -8bps from fees. Sentiment for USD fixed income assets softened this month driven largely by the sharp steepening of the US Treasury bond curve. However, Asian USD HY bonds somewhat outperformed the rest of the market by posting modest gains given the short duration nature of asset class as  well as the fact HY bonds are largely driven by credit rather than underlying interest rate risk. Meanwhile, given the yield premium of Asian HY continues to remain at elevated levels compared to other global regions, the market continues to attract inflows from non-Asian investors. Also helping market technicals was the primary new issue pipeline taking a back seat this month as China was out of the office for almost 2 weeks following the Chinese New Year holidays.

While high-beta Chinese real estate issuers including EVERRE, SUNAC and KAISA had a positive month, we did see weakness among some property developers favored by domestic retail investors such as LGUANG, RISSUN and GRLNGR. In our view, this was likely the result of a contagion overspill from the China Fortune Land (CHFOTN) default situation as many holders of that name, particularly leveraged private bank investors, have been required to liquidate other positions to cover CHFOTN margin calls. LGUANG bonds in particular saw its bond curve down 5-7 points this month as concerns over upcoming bond redemptions exacerbated the sentiment driven weakness of the market. However, the Sicuhan-based property developer subsequently reported that it has sufficient cash needed to cover its CNY 2.1bn onshore notes maturing in March and all its USD 492.5m offshore notes due in 1H21. In addition, the company announced it has bought back more than USD 30m of other tranches of its USD bonds from the secondary market helping stabilize market perception on the name.

Indian and Indonesian credits which underperformed in 2020 continued to rebound in February with a material spike in global commodity and energy prices helping market sentiment. Among the gainers was Indian energy and metals conglomerate, VEDLN, which saw its curve gain 3-5 points after the company issued a new USD 1bn 2024 bond. The proceeds of the new bond will be used to increase its stake in its cash rich operating subsidiary, which should help improve liquidity for debt service in future. On the other hand, under pressure Indonesian textile makers SRILIJ and PBRXIJ experienced another volatile month as delays continued in their respective planned USD bond issuances. PBRXIJ 22s paid its recent USD bond coupon but is required to replenish its Interest Reserve Account (IRA) to avoid a technical default and is in negotiation with banks to permit this. We continue to closely monitor the situation and, in particular, will keep a close eye on the relationship of these companies with their local banks which would underpin the bond recovery.

For the 2023 portfolio, we continued to experience inflows to the fund and took the opportunity to scale up our positions in some of the stronger Chinese issuers such as the GERGHK 23, CIFIHG 22, and YUZHOU 23s. As always our trading was focused on maintaining both single name and sectorial diversification of the fund and hence although liquidity remains strongest in China property issuers, we looked to balance our fund purchases into non-property and non-China sectors as well. We ended the month with an average portfolio yield on the portfolio of ~8.6% and an average duration of 1.3years, average rating on the portfolio remained BB-.  

The information contained herein is issued by JK Capital Management Limited. To the best of itsĀ  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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