November 2019

JKC Asia Bond Performance:
In November, the fund (USD unhedged share class) generated a total return of +0.10%. This compares to a return of +0.27% for the benchmark IBXX ADBI Index (Far East closing prices) over the same period, giving a net underperformance of -17bps. In terms of breakdown of the fund’s +10bps NAV performance for the month, -7bps came from price movements, +27bps came from interest carry, +2bps came from exposure to the JKC 2023 fund,  and –12bps from management and other fees, giving a gross total return (excluding fees) of +0.22% and a gross relative underperformance vs the benchmark (excluding fees) of  -5bps. As of the end of November, the portfolio AUM (combined across all share classes) stood at USD 58.6m, a decrease of USD0.8m vs the level at the end October 2019, mainly due to falls in the EUR during the month.

 

Another generally flat month for US Treasury bonds, with the 10yr benchmark bond closing the month at 1.78%, just 9bps higher than the end Oct-19 level. Asian cash bond credit spreads were similarly  little changed (widening just 3bps over the month for average BBB rated bonds), and hence returns for November were mainly driven by coupon accruals. News wise, it was an unusually quiet month for markets as politics generally took a back seat while the market began pricing in a much less dovish Fed going into next year with consensus expectations shifting to just one more rate cut in 2020. The ongoing trade negotiations between China and the US continued to swing between positive and negative headlines, although a move by the US government to pass the HK democracy bill did raise some concerns of China backlash. In Europe, approaching general elections in the UK saw the ruling conservative party extend its lead in the polls, raising hopes of a Brexit withdrawal agreement between UK and the EU which helped keep the GBP and the EUR currencies largely range bound despite the rising US rates. Dollar stability throughout 2019 has been a key support to the Asian market, particularly for emerging economies such as India and Indonesia.

 

Meanwhile US equities continued their 2019 rally, driving the S&P index to a new  all-time high on November 27th. This risk appetite in turn helped support a small outperformance of Asian HY over IG, although these gains were mainly driven by China Property bonds as sentiment for other parts of the Asian HY market remained soft. Chinese HY Industrials bonds in particular have come under pressure in recent weeks on fears of potential rising defaults again in the onshore market which could spill over to USD bonds. Indeed, news that Tewoo, a China state owned enterprise (SOE), was looking at a potential bond restructuring and haircut also raised concerns that government backing for SOE’s may be softening, several non-core SOE’s fell on the back of these headlines.

 

The JKC Asia Bond fund slightly underperformed the ADBI Index in November on a gross basis as our underweight of high yield China property and LGFV bonds cost some relative performance. One important offset however was Sri Lanka were we have a large underweight versus the Index and therefore benefited from a significant sell off in the country at the end of the month. Sri Lankan government bonds tumbled after the recently elected government signaled a raft of fiscal stimulus policies which could put the country at odds with austerity rules critical to ensure ongoing IMF financial support.

 

We ended November with an average portfolio yield of 3.61% (vs 3.55% a month ago and vs 3.70% for the ADBI) and an average portfolio duration of 4.76 (vs 4.82 a month ago and vs 5.01 for the index). Portfolio cash at the end of July stood at 6.5% (up from the 5.4% at the end of September) as some recent bond redemptions raised cash for the fund.
Outlook
As we approach year end we are confronted with significantly contrasting market sentiment.  In the Asian IG market, stability prevails and although credit spread valuations remain quite rich by historical standards, the global low interest rate environment maintains demand for Asian paper which still enjoys a small yield premium over US and European bonds. Going into year-end we expect the IG market to trade flat barring any unforeseen geopolitical shocks and liquidity to slowly diminish as we approach the holiday break. 
For Asian HY however volatility look set to remain elevated right up to year end. With a low risk appetite for non-Property names, individual bonds have become extremely sensitive to headline risk, with bonds moving as much as 5-10pts on any single announcement or rumour. Coupled with this is an increasing concern of rising onshore defaults in China, and more importantly, the Chinese government’s apparent willingness to accept rising defaults. Of course this has to be seen in the context of China’s existing low default rate, but this does indicate to us some signs of stress in the provincial banking system in China which could spill over into non-core industrial names.
Consequently our portfolio has zero exposure to any Chinese provincial banks and we have also been trimming our risk in non-core SOE’s. In HY while rising defaults is a concern we continue to believe investors are compensated for this risk with the significantly higher yields in the single and double B rated universe (particularly for non-property) and therefore we continue to maintain exposure to this sector but do so on a highly diversified basis.
In terms of duration we have moved back to a slightly short duration vs the benchmark as the Feds current loosening cycle appears to have paused and we continue to see the best value for IG at the shorter end of the curve.

 

JKC Asia Bond 2023 – Performance
  • Asia High Yield bond market sees small positive gains in November driven by a China Property and India/Indonesia names
  • Primary Issuance remained subdued this month also providing technical support to the market
  • Chinese Industrial Sector underperformed as concerns on rising onshore defaults resurfaced
  • The JKC Asia Bond 2023 fund gained +0.28% in the month as outperformance continues in China property (29% of the portfolio) but offset by some weakness in the Chinese Industrials sector
  • Fund ended the month with an average yield of 9.7% and average rating of BB-
  • Portfolio Individual line items stays steady to 132
In November 2019, the JKC Asia Bond 2023 fund produced a total return of +0.28%. This return was broken down by +57bps from carry, -21bps from bond price movements and -8bps from fees. Despite heightened market volatility, the Asian HY sector still managed to deliver positive returns which were primarily fuelled by the China Property Sector and previously lagging India/Indonesia names. This was however offset by the Chinese industrials sector where some high profile defaults in the onshore (CNY) market weighed heavily on sentiment for the USD names. Overall, however the general market tone remained risk-on as rallying global equities and confidence surrounding the US/Chinese trade talks helped buoy the market.

 

Looking at more regional news, the Chinese Property Sector continued to rally after a decent set of property sales following the Golden Week Holiday – a peak period for property sales. The sector has managed to post contracted sales of RMB 11.1 trillion for the first 10 months in 2019, representing a YoY growth of 7.1%. Given there has been easing of home purchase restrictions across multiple cities in China, we believe the outperformance of this sector sound be maintained in the near term, justifying our recent move to increase weighting from 25% to 29%.
 
New primary issue supply in November continued to be relatively muted which also provided technical support for the Asian HY market. That said sector diversity remained poor with China Property and LGFV bonds continuing to dominate new issue flows albeit at lower volumes than market expectations. Going forward, we expect new issue supply to continue tapering down as we enter Christmas Holidays and into the New Year.
 
Aside from China property names, the JKC Asian Bond 2023 fund performance was largely buoyed by the rally in Indonesian and Indian credits which have played catch-up to their Chinese counterparts. In India, the Modi government and central bank have discussed into creating a new RBI backed Special Purpose Vehicle (SPV) that will buy stressed assets from financial firms, thereby removing the stress in the NBFCs. As a result of this headline, we saw NBFC shares and bonds including portfolio names like IHFLIN move higher.
 
These gains were however offset by the Chinese Industrial sector which has experienced a number of onshore and offshore defaults lately as corporates find it increasingly more difficult to obtain bank financing. In addition, we believe the Chinese government is becoming more open to the idea of allowing State-owned enterprises (SOE) to restructure their bonds. For example, we saw local Tianjin SOE, TEWOOG (no-exposure) propose a debt restructuring plan for it’s for offshore dollar bonds which sparked  significant weakness in other government owned sectors such as the University names (held under the Ministry of Education). While we do have exposure to some university bonds we have been reducing our positions recently on this concern.
 

 

The yield on the portfolio remained at 9.7% for November whilst 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. Trading wise, the line items in the portfolio remained unchanged at 132 as we added new property name (Shui On Land) but lost our position in Indonesian Textile company Sritex after the bonds were called for redemption. Given we are close to the end of the year, we expect trading activity to reduce this month as the sell-side brokers begin to close their trading books. 

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