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January 2021

JKC Asia Bond Performance

In January, the fund (USD unhedged share class) generated a total return of -0.14%. This compares to a return of 0.07% for the benchmark IBXX ADBI Index (Far East closing prices) over the same period, giving a net underperformance of -21bps. In terms of breakdown of the fund’s -14bps NAV performance for the month, -31bps came from price movements, +27ps 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 -0.03% and a gross relative underperformance vs the benchmark of -10bps. It should be noted that material bond pricing mismatches at month end cost the fund an estimated 25bps of relative performance and adjusting for this, the fund would have outperformed the index on both a net and gross basis. This pricing mismatch should be reversed in the portfolio’s favour in February. As of the end of January, the portfolio AUM (combined across all share classes) stood at USD63.4m, down USD0.7m from the USD64.0m level at the end December driven primarily by a 0.7% decline in the EUR (vs the USD) over the month.

It was a volatile, but ultimately little changed, month for Asian USD bonds as whipsawing US Treasuries and risk sentiment set the tone for the market at the start of 2021. Once again it was US politics that provided the key catalyst as the final few weeks of the Trump presidency proved to be some of the most politically  destabilizing. Notwithstanding the capitol riot on January 6th which effectively ended Donald Trump’s campaign to overturn the 2020 election, perhaps the most important development in January was  Democrats securing control of the US senate following victory in the Georgia run-off election which gave Biden a clean sweep of the US legislature and therefore provided a much stronger mandate to push through his fiscal agenda. US Treasuries reacted predictably with the 10 year bond yield climbing 25bps to a 10mth high of 1.19% while the US yield curve moved to its steepest level (as measured by the 2yr10yr spread) since 2017. This move was short lived however as  the rate of COVID infections and a disappointing early role out of vaccines quickly tempered growth expectations. With additional market soothing comments  from the FOMC regarding QE tapering fears, the UST bonds quickly recovered, the 10 year yield ending the month at 1.06%.

Asian USD bonds largely followed the UST moves as the market sold off in early January but recovered the losses by month end. Credit spreads saw a slight widening but this was more  than offset by Asia’s high carry which remained at a healthy premium to US and Europe, allowing the  asset class  to still generate small positive returns for the month. This was even despite a massive supply pipeline with $56bn of Asian new issues during January, the first time Asia’s dollar primary market has exceeded $50bn in a single month.

High Yield bonds slightly outperformed  investment grade in January although this mainly reflected the shorter duration and higher carry of the HY asset class as credit spreads themselves were not a positive driver of returns. By extension, on a segment basis the biggest underperformers were long duration sectors  such as Indonesian, Chinese and Malaysian oil names as well as Philippines sovereign bonds.  We also saw Chinese internet issues weaker during the month on concerns of increased antitrust tightening by PRC authorities. Within the HY sector, a sharp drop of the bonds issued by Chinese Property company, China Fortune Land (CHFOTN), weighed on both the IG and HY benchmarks as the company has a material presence in both the ADBI and AHBI indices. The bonds fell 45pts during the month on, as yet unconfirmed, rumours of reduced support from its key shareholder Ping An Insurance. The China Property sector additionally saw supply induced weakness as new issue volumes jumped as companies looked to secure financing before the Chinese New Year break.

As mentioned above, while the JKC Asia Bond fund underperformed the ADBI index by 10bps on a gross basis in January, this was mainly driven by a significant mismatch between custodian and index bond pricing sources which is expected be corrected next month. Adjusting for this, the fund would have outperformed the index, driven by a combination of a lower average duration compared to the index as well as an underweight in key weaker names including the CHOFTN bonds  which are only hold with a very small exposure via the 2023 fund. We also saw some strong gains in off benchmark positions for the portfolio including the LG Display convertible bond which we sold after a 7pt rally in the month. Offsetting our relative gains was our underweight in certain sectors such as Sri Lanka, Pakistan and Chinese LGFV’s which rebounded  after weakness in late 2020.

The EUR pulled back against the USD in January although we continued to look for new opportunities to refinance recently maturing positions, particularly targeting the primary markets. This strategy included adding new positions in recent new issues such as Central China (CENCHI 25), Singapore Airlines (SIASP 26) and Zhongsheng (ZHOSHK 26).  We ended January with an average portfolio yield of 2.68% (vs 2.63% a month ago and vs 2.70% for the ADBI) and an average portfolio duration of 5.32 (vs 5.29 a month ago and vs 5.55 for the index). Portfolio cash at the end of November stood at 3.3% (compared with 4.0% at the end of December).

Outlook

After the frenzy of new issues  in January we expect market activity will slowdown in February as we approach the Chinese New Year break. Furthermore, the recent stabilization of the UST yield curve has likely removed urgency for Asian corporates to rush their bond issuance. This should bring some much needed relief for the Asian bond market which is beginning to show signs of primary market indigestion.

With Trump political volatility now somewhat out of the picture, we expect more traditional macro signals to re-emerge as the key drivers for the bond market. In other words, attention will focus back to the interplay of the economy and fiscal/monetary policy. In this regard, COVID remains the greatest sensitivity and clearly much of the COVID vaccine optimism at the start of the  year appears to have been premature as  cases  continue to soar while vaccine rollouts disappoint. While this may pause the recent curve steepening trend, we believe higher UST yields and USD weakness is inevitable given Biden will still want to push forward his fiscal agenda while he maintains  control of the Senate and House. We continue to position our portfolio on a short duration bias vs the benchmark on this basis.

In the Asian region the key consideration regarding COVID will be the extent to which the Chinese authorities’ suppression of people movement over the Chinese new year holiday  creates a headwind on consumption demand. We are already starting to see some sensitive sectors such as tourism and retail names trade cautiously ahead of the holidays although it is the property sector that will inevitably have to biggest impact on our markets. That said, last year property names  demonstrated incredible resilience as recent announcements of full year sales suggest, companies were able still to achieve impressive growth despite lockdowns. In our view, as demand for the sector remains robust it will continue to be government policy that drives bond performance and while recent tightening measures, such as the new three-red-line rule, my raise some concerns on volatility, this is ultimately positive to the stability of the sector, in our view. It is very telling that despite the recent sharp drop in the bonds of large scale issuer CHFOTN, we have not yet seen this translate into a major sell off across the rest of the sector indicating Chinese property bonds  remain attractive to domestic investors.

JKC Asia Bond Performance 2023 – Fixed Maturity Fund October 2020 Update:

  •  Asian USD HY Bond market started the year cautiously with bond prices moving largely sideways
  • China HY property bonds underperformed as fall of large cap issuer CHFOTN weighed on the sector
  • Indian and Indonesian issuers meanwhile outperformed as the sector continued to rebound from the 2020 sell off and stable USD helped drive positive EM sentiment
  • Ramp up of bond supply kept overall yields elevated but is was well met by investor demand due to inflows into the asset class.
  • The JKC Asia Bond 2023 fund ended January with an average yield of 8.10% while duration continued to come down (currently 1.4 years), issuer line items increased to 155 (across 125 issuers).

In January 2021, the JKC Asia Bond 2023 fund produced a total return of +0.10%. This return was broken down by +51bps from carry, -33bps from bond price movements and -8bps from fees. Following an incredible rally last month for the Asian HY market, performance was largely flat this month as market participants have been keeping close tabs on the formation of Biden administration and, in particular, the US stance toward China which has yet to unfold. However, given the yield premium of Asian HY remains at elevated levels, the asset class continues to attract inflows providing a backdrop of strong market technicals. The strong inflows have also been met with a robust primary issue pipeline as January has been (as is typically the case) a month of blockbuster supply. This translated into a record month for primary issuance of USD 56bn as many Chinese corporates wanted to get their financing done before the Chinese New Year holidays in mid February.

The Chinese HY market underperformed the rest of Asia markets this month as bonds issued by large cap Chinese property developer, China Fortune Land Development’s (CFLD), remained volatile in January even as the company reached settlements over missed payments with the lenders of two trust loans thereby averting cross-defaults on its onshore bonds. We continue to monitor closely of the developments between CFLD and one of its largest shareholders Ping An, China’s largest insurer, as they are still in negotiation with the help of the Hebei government with upcoming bond maturities. It is also worth noting that despite the negative price action the company continue to service USD bond coupons during the month. Meanwhile, this idiosyncratic event has become more isolated and has weighed less on the overall property market sector sentiment. For example, fellow Chinese property developer GZRFPR which had traded weakly at the end of 2020, saw its curve up rise 1-5 pts as the bonds were buoyed by a 19 January announcement on the completion of a 70% stake sale in a logistics park in Guangzhou for RMB 4.06bn. Proceeds from the sale will be used to repay debt and for working capital.

Indian and Indonesian credits continue to outperform in January as they recover losses from 2020. Among the gainers was Indian commodities giant, Vedanta, which saw its bonds up between 7-10 points as there is increasing likelihood of success for the company’s consent solicitation which is seeking to remove a 30-day limit on new borrowings that was specifically allotted for the purchase of Vedanta Limited shares. This should give the company greater flexibility to increase its stake in its Indian listco, Vedanta Limited, which is ultimately cash flow positive for USD bond holders. Other strong gainers during the month included THSCPA, GERSP and AMNNIJ.

On the other hand, Indonesian textile makers SRILIJ and PBRXIJ had a volatile month as both companies experienced delays in planned USD bond issuances. PBRXIJ 22s saw its bonds tumble 18 points as the company is facing a challenging timeframe due to a delay by bank lenders to sign a standstill agreement on its USD 133m due 27-January revolving credit facility which was only signed at month end. We continue to closely monitor the situation and keep a close eye on the relationship of these companies with their local banks.

For the 2023 portfolio, it was another month of adding assets as we continued to experience sizable inflows to the fund. Firstly, we took the opportunity to scale up our position in some Chinese property developers such as the RISSUN 23s and GZRFPR 23s. In addition, we increased diversification by adding exposure to higher quality names including Chinese central SOE chemical company HAOHUA 23s, which despite its IG rating has been trading at attractive levels.  We ended the month with an average portfolio yield of ~8.10% and an average duration of approximately 1.4.  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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