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October 2020

JKC Asia Bond Performance

In October, the fund (USD unhedged share class) generated a total return of -0.14%. This compares to a return of -0.12% for the benchmark IBXX ADBI Index (Far East closing prices) over the same period, giving a net underperformance of -2bps. In terms of breakdown of the fund’s -14bps NAV performance for the month, -39bps came from price movements, +28ps came from interest carry, +8bps came from exposure to the JKC 2023 fund, and -12bps from management and other fees, giving a gross total return (excluding fees) of -0.02% and a gross relative outperformance vs the benchmark  of +10bps. As of the end of October, the portfolio AUM (combined across all share classes) stood at USD60.1m, broadly unchanged from the USD60.6m level at the end September.

Asian USD bond markets saw largely flat performance in October as the resurgence of the COVID-19 virus in US and Europe and pre-election uncertainty kept most investors on a defensive footing although we saw little signs of panic in the region. US Treasuries were softer through the month but remained mostly within the recent trend, the 10yr bond yield ending the month up +19bps at 0.87%, still within the 0.6%-0.9% trading range that has broadly held firm since the Fed initiated its COVID monetary stimulus program in March. Asian Investment grade cash credit spreads meanwhile remained extremely resilient as weakness in European and US equity markets failed to significantly destabilize bond prices in the region. Tighter spreads in Asia offset the UST weakness containing losses in the region. Even HY bonds, typically more sensitive to equity market sentiment stayed reasonably firm, the Asian HY index down just 0.58% over the month, steadying after September’s property market led sell off. A stable USD also helping to maintain general EM sentiment in the region.

China reported robust economic data in the month and, although the 3Q GDP came slightly weaker than market expectations, this still demonstrated the country’s global outperformance in recovering growth after the COVID shutdowns earlier in the year. Even Southern Asia showed signs of finally bringing the virus under some degree of control with daily new cases declining in India, Indonesia and Philippines throughout the month. This was in stark contrast to US and Europe where new virus cases surged in a second wave that saw many developed economy resort to new lockdowns to contain the spread. In the US, financial markets were further disappointed by a failure of congress and the white house to reach an agreement on a new fiscal stimulus program that will now have to wait until after the US presidential election in early November. This was clearly an important factor driving US equity weakness and left Asian markets in a holding pattern waiting for the election result before the market can forge a new trend. That said, polls increasingly signaled greater odds of a Biden victory and even a potential democrat clean sweep began to be priced into asset markets. This could be seen in the steepening of the UST curve in October as a strong Biden mandate is forecast to ignite large scale fiscal spending. Nevertheless as 2016 proved, polls can often be misleading, and UST markets did continue to see significant volatility despite the overall negative trend.

Within Asia, outperforming segments of the market were in the EM sectors such as India and Indonesia as the stable USD buoyed sentiment and falling daily virus cases improved the outlook for an economic stabilization in the region. Within these countries, recently underperforming sectors such as Indonesian HY commodities and property names and Indian financial bonds led the gains while Mongolian sovereign bonds also received a boost from a tender offer for the MONGOL 21 bond. In a major contrast to this trend, however, Sri Lankan sovereign bonds continued to see severe weakness following the Moody’s downgrade last month as investors started to price in an increasing likelihood of a potential debt re-profiling for the country. The benchmark SRILAN 30 bond ended October at 55 down 14pts on the month. In China, IG dollar bonds were little changed although this could be considered a good performance given the weak global sentiment overhang combined with the fact we saw another month of a heavy new issue pipeline in the PRC including jumbo deals from the China sovereign and a debut issue from Chinese internet giant Meituan.

The JKC Asia Bond fund outperformed the Asian ADBI Index in October on a gross basis mainly on account of our short duration bias and underweight exposure to Sri Lanka which was clearly the month’s biggest underperformer. We also saw strong performance from some of our off-Index exposures such as convertible bonds and RMB currency bonds which benefitted from further gains in the Chinese currency. Meanwhile, aside from the Sri Lanka sovereign, most of the portfolio’s biggest fallers in October were long duration positions. We did also see some negative impact from Vedanta after the company unexpectedly failed secure its planned  equity delisting, however our decision to reduce our position early in the selloff capped our losses. In fact, overall we achieved strong outperformance in our HY segment with our 8% position in the JKC 2023 Fund retuning +0.62% in October vs -0.58% for the HY Index. 

Given the stable EUR/USD currency and a lack of attractive new issue opportunities we did not active trade positions during the month and ended October with an average portfolio yield of 3.15% (vs 3.08% a month ago and vs 2.88% for the ADBI) and an average portfolio duration of 5.25 (vs 5.25 a month ago and vs 5.53 for the index). Portfolio cash at the end of October stood at 3.8% (compared with 4.2% at the end of September).

Outlook

With the US election imminent, we expect greater market clarity to emerge in the coming few weeks, albeit there remains some potential for short term volatility as the high postal ballot turnout will likely lead to some delay in getting a definitive result. As the 2016 election result showed, any clean sweep, either Republican or Democrat, will raise the expectations of a meaningful increase in fiscal stimulus and could drive the steepening of the yield curve although this has, to some extent, began to be priced in recently. Nevertheless we remain comfortable with our slight duration underweight going into November.

On the other hand we believe the passing of the election could drive an improvement on risk sentiment to the extent it removes a major political uncertainty and given the continued loose monetary policy in US and Europe, combined with greater fiscal spending we will look to move slightly down the credit curve  into higher risk assets going into year end.

Obviously the recent spike in COVID remains an overhang but given the continued demonstration of Asia’s ability to better manage the outbreak, we believe this would be relatively positive for Asian risk assets which have maintained the manufacturing capacity to service a potential recovery of  consumption demand from the west, either through fiscal stimulus or an economic recovery fueled by vaccine optimism. At the very least, the stark contrast of monetary policy between loose western central banks and liquidity tightness in China should keep Asian currencies firm against the dollar which further supports EM risk sentiment. A firm RMB currency provides good fundamental support for Chinese USD bond issuers and we will also look to further raise our exposure to domestic RMB sovereign and policy bank bonds particularly at the short end of the yield curve. 

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

  • Although the Asian USD HY Bond market was weaker in October our 2023 portfolio significantly outperformed (+120bps vs HY Index) during the month
  • Our overweight of Indonesian HY credit, underweight of long duration subdebt paper and some single name gains underpinned the funds outperformance.
  • A series of tender and exchange offers, in particular, drove some significant gains in individual positions
  • Meanwhile we continue to benefit from our underweight in Sri Lankan sovereign bonds which remain under material credit pressure
  • The JKC Asia Bond 2023 fund ended October with an average yield of 10.3% while duration continued to come down (currently 1. 5 years), issuer line items stood at 121 (across 133 positions).
  • Asian HY bond yield premiums (vs US) increased in October and remained well above historical average, providing a good opportunity for investors to still capitalize on market recovery

In October 2020, the JKC Asia Bond 2023 fund produced a total return of +0.62%. This return was broken down by +59bps from carry, +11bps from bond price movements and -8bps from fees. Our JKC Asia Bond 2023 portfolio had a largely positive month and while the fund is not officially benchmarked against any Index, it outperformed the Market ADBI Asian HY Bond Index by an impressive 120bps in October. This brought the fund’s gross ytd outperformance vs the Asian HY Index to +0.66%.

Multiple factors drove our strong gains during October including our overweight exposure to Indonesian credits, which had been previously lagging for most of the summer, an underweight in long duration subordinated bank bonds, which declined on the back of rising UST yields, and significant gains from certain single name positions on the back of idiosyncratic special situations.

Specifically, we saw a host of exchange and tender offers in our portfolio including, Indonesian coal mining company Geo Energy (GERLSP) which launched an “any-and-all tender offer” to purchase its outstanding USD 154mil GERLSP 22 notes, property company Alam Sutera which announced an exchange offer for its 2022 bonds and Malaysian aluminum producer Press Metal which announced a tender for its 2022 bonds. In each of these these cases we decided not to tender the notes in anticipation that refinancing risk would be greatly reduced upon completion of the refinancing offer and, indeed, we saw each of these bonds rally significantly (10-20pts) post event. While one could argue that the bonds could become much more illiquid after the tender offer, we see the reduction in refinancing risk outweighs the this downside.

Elsewhere, Chinese tech giant LENOVO also launched a tender offer to purchase its due 2023 notes at price of 105.50. Once again, we decided not to participate in the tender offer as we believe the company could call the bonds later at a higher price. Nevertheless the LENOVO 23 notes performed well after the successful tender offer gaining +2.5 points. On the flip side not all corporate actions were as successful as demonstrated by the failed delisting attempt of Indian mining giant Vedanta Limited by its parent Vedanta Resources. Our VEDLN 23 notes dropped after the move prompted both Moody’s and S&P to issue a negative credit outlook for the company.

Another source of outperformance for the fund was our underweight (zero) position in the Sri Lanka sovereign curve which saw its bonds weighed down by concerns over a sharp deterioration in the country’s GDP and its reluctance to approach the IMF for a comprehensive refinancing program. The entire curve fell 10-15 pts in October after Moody’s downgraded the sovereign rating to Caa1 at the end of last month.

The China HY property sector meanwhile slightly underperformed again this month following the introduction of the “Three Red Lines” policy last month and related concerns surrounding property giant Evergrande’s difficulty in getting an onshore listing of its domestic property unit. Nevertheless although sentiment has weakened recently, fundamentals for the sector remain strong in our view. Independent property research agency CRIC published strong industry sales figures for the month of October up +22% y/y and +9% y/y for the first 10 months this year. The robust sales growth has prompted some outlook and ratings’ upgrades of developers including China Aoyuan which was upgraded one notch to BB by Fitch and also Seazen Group which had its outlook revised to positive by S&P.

For the 2023 portfolio, it was a quiet month in terms of trading activity as we decided to maintain a slightly defensive posture going into expected market volatility in November. That said, after some redemptions in certain bond positions through company calls, we added exposure to Vietnamese bank VIPRJS 22 and Chinese developer SINHLD 22s in order to maintain our diversification strategy for the fund.  We ended the month with an average portfolio yield on the portfolio of ~10.3% and an average duration of approximately 1.5years. As the overall Asian HY market declined in October, the yield premium of the market (compared to equivalently rated US HY bonds) increased slightly, particularly in the single-B rated segment. The premium remains high by historical standards presenting a good investment opportunity. 

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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