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January 2024

JKC Asia Bond 2025 – Fixed Maturity Fund January 2024 Update:

  • Rally across global risk assets continued in December as the US Federal Reserve committee members pencilled in at least three rate cuts in 2024.
  • Leading the market move was a continued rally in US Treasury bonds as the 10-year yields creeped below the 4% mark.
  • The rebound of China’s property sector slowed in December although there were pockets of outperformance from certain non-defaulted developers.
  • Macau gaming concessionaires’ bonds continued to be firm in December after the city posted another month of solid gross gaming revenue (GGR) figures and Studio City repurchased partially its USD bonds.
  • Away from China, headlines in India were dominated by mining conglomerate Vedanta Resources as the company seeks to extend maturities of its 2024 and 2025 bonds.
  • Meanwhile, Indonesian shopping mall operator Lippo Malls Indonesia Retail Trust (LMIRT) saw a lower-than-expected percentage of bondholders tender their bonds.

December proved to be another strong month for risk assets after the US Federal Reserve held interest rates steady for a third consecutive time at its December policy meeting. The FOMC also set the table for multiple rate cuts in 2024 with the committee’s “dot plot” projecting 75bps of cuts (median dot) in 2024 and a further 100bps in 2025. Although this was reportedly less than what the market had been expecting, it was still a significant hawkish shift from the previous (September) projection amid a brightening picture for inflation which continues to approach the 2% target. As a result, US Treasury yields continued to rally across the curve, with the benchmark 10 year ending the year at 3.88% (down 111bps from the October highs). Meanwhile the fall in underlying policy rates continued to coincide with a tightening of global credit spreads as the market, for the time being, appears to be still expecting a goldilocks soft landing for the US economy. The November/December rally in US equities certainly suggests a healthy risk appetite going into 2024 but it remains to be seen whether US policy makers can continue to bring down inflation while avoiding a recession through softer monetary policy. Key consumption and jobs data in early 2024 will be closely watched in this respect.

For Asian fixed income, tighter credit and lower US Treasury yields meant another month of strong performance for both IG and HY USD bond markets with long duration bonds leading the gains. In China, there was a slowdown of property stimulus signals by the government following a flurry in November and as such gains for the sector were more modest, although a couple of exceptions did outperform. Bonds issued by residential and commercial real-estate conglomerate Dalian Wanda (DALWAN) jumped 12-15 points after the company announced it had signed an agreement with private equity company PAG and other pre-IPO investors in its shopping-mall arm Zhuhai Wanda. Under the deal, PAG and other investors will collectively own 60% of Zhuhai Wanda, whilst parent company, Dalian Wanda will remain the largest single shareholder with 40% shares. From a credit standpoint, this would eliminate any near-term put risk from pre-IPO investors and instead Dalian Wanda will be expected to obtain new money of RMB 28bn.

Meanwhile, Chinese trade and logistics-centre operator, China South City (CSCHCN) saw its USD bonds up 3-5 points at month-end after investors took the view that the company would either improve its consent solicitation to extend its bonds or abandon it altogether and pay the missed November coupon on its bonds due July 2024 before the 30-day grace period. There appears to be a stronger sense of optimism among China South City keepwell-backed bondholders as it is believed the prospects of recovery may be significantly brighter. Not only is the keepwell provider, Shenzhen SEZ Construction and Development Group Co, an asset-rich SOE, but its keepwell agreements are drafted in a manner that will likely see them more efficiently enforced in Hong Kong courts. In addition, the ad hoc group has stated that it has a blocking stake across multiple tranches and will vote against the company’s proposal should they fail to cure the missed coupon.

Meanwhile, the Macau gaming complex continued its strong momentum this month after posting yet another set of strong gross gaming revenue (GGR) figures for the month of November. The city posted 11M23 GGR of MOP 164.49bn (USD 20.41bn) which was up 325% YoY and was 65% of 2019 pre-Covid levels, which continues to defy analysts’ expectations about the pace of recovery for the city. The Studio City complex continued to see gains last month after the company completed the repurchase of USD 100m of its bonds. We remain constructive on the sector from a valuation standpoint as we believe the spread differential between Macau and US gaming names will compress further.

Away from China, Indian commodities conglomerate Vedanta Resources Ltd dominated headlines as it had a volatile month but still ended December up by 4-8 points. The complex was initially spurred on by news that the company had signed a USD 1.25bn due 2026 loan with various private credit funds to back its liability-management exercise for its three near-term maturing offshore bonds. However, Vedanta’s USD bonds were indicated down two points after the company emerged with a long-anticipated consent solicitation for its four tranches of bonds which would partially redeem upfront at par at various percentages of the principal. At the same time, the remaining bonds due will be extended between three and four years.  

Meanwhile Indonesian shopping mall operator LMIRT announced in late December the results of its tender offer which saw only 18.77% and 21.21% of its bonds due 2024 and 2026 respectively tendered. This result showed that a far greater number of investors were willing to hang on to their bonds rather than to tender, indicating bondholders were more positive on the trust’s prospects than LMIRT’s management and its parent, the Riady family. The JKC Asia Bond 2025 fund also did not participate in the tender offer as we believe the company has high quality unencumbered assets which could be pledged to get additional loans to refinance the USD 188m remaining on its bonds due 2024. In addition, LMIRT emerged with an IDR 2.5trn (USD 160m) secured loan to fund its tender offer, despite LMIRT management previously saying to bondholders that obtaining new financing would be difficult. With the results of the tender offer, we saw LMIRT bonds continue to rise as the issue due 2024 was up over 15 points by the end of December.

The JKC Asia Bond 2025 (USD share class) fund posted a return of 2.36% in December which outperformed the Asian HY Index but this was largely driven by reversal gains from the swing price at the end of November. Stripping out the swing price effects, we would have underperformed the wider market in December because the significantly shorter duration of the fund (vs the HY index) prevented us from capitalizing on most of the markets gains which were long-duration driven. We foresee this duration-led rally to continue next year as markets continue to increasingly price in rate cuts for 2024. Although the extent of gains should begin to slow down as the recent rally in global credit spreads looks unsustainable in the face of a slowing economy. Meanwhile for China, we believe the government will continue using easing fiscal and monetary policy as the property sector has yet to stabilize and as it remains a drag on the economy. 

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