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July 2021

JKC Asia Bond Performance 2023 – Fixed Maturity Fund April 2021 Update:

  • Asian USD HY Bond market experienced a sharp selloff in July, largely driven by negative sentiment in Chinese real estate
  • China property weakness mainly fueled by concerns regarding ongoing tight government policy in the sector and rising fears surrounding property giant China Evergrande
  • Other sectors and geographies in Asia much more stable showing market weakness remains highly sector specific, Indonesia bonds continue to be supported by buybacks and tenders
  • JKC Asia Bond 2023 portfolio significantly outperformed wider Asian HY market, largely due to our disciplined diversification strategy and specific underweight to high beta China property names
  • The JKC Asia Bond 2023 fund ended July with an average yield of 10.5% while duration continued to come down (currently 1.2 years), issuer line items stood at 126 (across 175 positions).

In July 2021, the JKC Asia Bond 2023 fund produced a total return of -2.31%. This return was broken down by +57bps from carry, -280bps from bond price movements and -8bps from fees.

The Asian USD High Yield bond market experienced significant market weakness in July with the Markit IBoxx HY Index (AHBI) falling -4.10%, its largest single month decline since the COVID selloff last year (in fact the 5th biggest monthly decline since the index was created). The main driver for this fall was negative price action in Chinese real estate bonds which have faced weakening local investor sentiment, mainly driven by persistent tight government policy towards the sector.  Exacerbating the situation was further media pressure on the Asian HY market’s largest bond issuer, China Evergrande, which saw a raft of negative news headlines throughout the month. Given the large size of this issuer and the fact it holds a material position in most benchmark Asian HY bond portfolios, this has created a vicious cycle whereby overall market perception on credit fundamentals has become more correlated to bond price performance than actual bottom up analysis.

We do have some sympathy to this view given Evergrande, like most global HY issuers, faces ongoing refinancing demands in the international bond market. Although we still maintain a fundamental ‘going-concern’ approach to assessing Evergrande’s credit (market too – as bonds trade with accrued interest), we believe in the current stress environment, the market will become increasingly focused on external support scenarios and recovery valuations to drive Evergrande bond performance. On this matter we have also carried out extensive internal assessment in recent months. Opinions in the market of course always vary, but we do observe that at current levels Evergrande bonds are already trading below our own internal recovery values as well as those published by many sell side analysts in the market.

That is before taking into consideration the significant implication of an Evergrande default would have on the overall Chinese economy. While it has been an increasingly popular opinion in the market that Evergrande is no longer seen by policymakers as ‘too big to fail’, we believe regulators would still be extremely cautious to avoid a significant contagion of fear spreading across the whole sector. Particularly as it remains one of the largest exposures for the Chinese banking system. Certainly, in the past month while we did see some decoupling between the Evergrande and certain stronger BB rated developers, we have still seen many high-beta large-cap property names like Sunac (-5pts), Yuzhou (-9pts), Fantasia (-9pts), Kaisa (-15pts), Guangzhou R&F (-18pts) all sharply lower in July following the Evergrande price action. Hence while Evergrande may not be too big to fail, the whole property sector most certainly is and so we believe the fear of an Evergrande default triggering a full scale run on the property sector will be a greater social-economic importance to Chinese policy makers than it was a month ago. This is positive, to the extent Evergrande’s current situation is mainly driven by China’s own tight policy action, giving Beijing the ability to quickly improve sentiment if it wishes to. Meanwhile with Evergrande already trading at deeply stressed valuations, the direct negative impact of this name on the market should be very limited going forward.

From a portfolio perspective the past month has clearly been challenging but we believe the significant outperformance of the JKC Asia Bond 2023 fund compared to the overall Asian HY market in July alone (+179bps on a net basis) does demonstrate merit of our high diversification strategy and careful single name position risk weightings, where our portfolio has a natural built-in underweight of large cap high beta property issuers which led the declines in July. Meanwhile, focusing on pure default risk on a hold to maturity basis rather than marked-to-market moves also gives us the ability to maintain a highly consistent strategy through market volatility whilst avoiding the dangers of potentially selling positions at the bottom of the market.

Away from China property the market was relatively benign in July. There were some scares in the Chinese education sector after the government announced new guidelines imposing restrictions on after-school tutoring companies. Investment Grade rated, New Oriental Education (the fund is not exposed), saw its bonds fall -11pts in the month on the back of the announcement. We do have a small position in international school operator Bright Scholar (BEDUUS) which fell -4pts in sympathy to the news although the company has since come out to say the rule has little impact on its business and announced plans to buy back 10% of its bonds issue to help stabilize prices. Elsewhere, Chinese chipmaker THSCPA bonds were up almost +15 points this month following the company’s swift announcement of the restructuring of both its 2021 and 2022 bonds.  The restructured bonds will have credit enhancement features including guarantees from key Tus-Park subsidiaries which have significant stakes in 21Vianet Group and Beijing Enterprises Clean Energy.

In the non-China space, India and Indonesia HY markets remained firm this month, assisted by news of tender offers by companies in these markets. Indonesian coal-mining contractor ABMMIJ saw its bonds jump over 5 points in July after the company launched a tender offer which was capped at a level equivalent to the net proceeds of the new USD notes offering. ABMMIJ issued a new USD200 million bond to finance the tender offer.

For the 2023 portfolio we continued to be balanced and disciplined with our sector diversification approach remaining highly aware of the China property market volatility. With subscription inflows we scaled up our position in some Indian and HK names such as the BB rated financing company MUTHIN 23 and added some YESIN 23 after the India bank produced some stronger than expected FY21 results. In Hong Kong we added to our positions in Asian regional logistic property company ESR and HK property company Far East Consortium. Within China we increased our exposure to the China industrials sector via Chinese lithium-compounds producer TQLTHI 22 which is benefitting from the ongoing boom in electric vehicle sales, as well as water treatment company CWAHK 22. We ended the month with an average portfolio yield of 10.5% and an average duration of approximately 1.2 years.  

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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