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August 2023

JKC Asia Bond 2025 – Fixed Maturity Fund August Update:    

  • The month of July saw global risk sentiment remain firm as US economy slowly shifted further into disinflation mode and the Fed interest rate cycle is seen peaking.
  • However, Asia high yield (HY) markets reversed gains from last month, largely driven by the weakness in the China HY property sector.
  • Non-defaulted Chinese property bonds whipsawed with names like Country Garden and Shui On Land experiencing heightened volatility.
  • Although newswires continued to signal increased urgency on policy relaxation in China, market remains unconvinced about an imminent turn around for the real estate sector.
  • Asian HY credits outside of China held up well with Macau gaming concessionaire bonds on a stable footing after 2Q23 gross gaming revenue (GGR) reached 87% of 2Q19.
  • Meanwhile Pakistan was once again the best performing market as financing negotiations with the IMF continue to proceed well.

Despite a generally ‘risk on’ tone for global markets in July, the JKC Asia Bond 2025 fund produced a negative total return of -2.00% over the month, once again weighed down by the stalling Chinese economy and in particular further concerns surrounding real estate HY bonds. This move took the year-to-date return to −7.36%.

The positive global investor sentiment extended the previous month’s gains after the US Federal Reserve kept policy rates unchanged in June followed by a well-telegraphed 25 bps rate hike in July. Risk assets were further spurred by a lower-than-expected US June Consumer Price Index print of 3.0% YoY, which was the smallest rise since 2021. As such, this boosted expectations that the Federal Reserve may soon end its current interest rate hike cycle and the market began to price in this scenario.

Closer to home in China, markets also started July positively after the timing of the regularly scheduled July Politburo meeting was brought forward which many took as a sign that policymakers in Beijing were seeing the urgency to stimulate the economy, after a notable slowdown of economic activity in recent months. Increasingly onshore press reports focussed on the weak real estate market as a key cause of the current economic malaise. In the press statement following the government meeting there was an omission of the long-standing statement that ‘housing is for living and not for speculation’.  Some market commentators took this as a signal that the central government was finally giving a green light to local governments to launch bigger property easing measures.

However, as the month progressed, confusion returned over what tangible policies the government was prepared to launch and investors were once again disappointed by the lack of immediate concrete action. This created volatile conditions for the Chinese real estate sector which, despite now only accounting for approximately 10% of the Asian HY market, still remains the largest market mover. High beta not-yet-defaulted property bonds were the biggest underperformers.  For example, bellwether Chinese developer Country Garden saw its bonds whipsaw in July as concerns grew that the company could somewhat be the last sizeable standing privately owned developer to be forced into debt restructuring negotiations. These concerns were sparked by an official Country Garden WeChat post, saying that it was committed to ‘ensuring the company’s credibility’. Further compounding these concerns was a Bloomberg report that KPMG had been brought in to perform due diligence on the company (later denied by management).

The negative sentiment in the China property sector was further exacerbated last month after Shui On Land surprised the market by launching the process of identifying holders of two USD bond tranches. Shui On’s bonds lost around 10-13 points after the developer engaged Morrow Sodali to do so, a typical precursor to restructuring talks. Shui On, a China property developer that is unusually incorporated in Hong Kong, had previously enjoyed an easier access to funding compared to its Chinese based peers. The market was surprised to discover that even Shui On, historically an outperformer, was looking increasingly like a candidate for restructuring. One positive development was Dalian Wanda (DALWAN) repaying its July 2023 bond as scheduled, but that was not before a massive 30-point swing in the bond price in the week that preceded the redemption, signalling the huge uncertainty and volatility prevailing in the sector.

Defaulted property bonds, though less volatile, also continued to trade heavy in July. Most of these bonds are now priced in the mid-single digits with few investors bids likely until we get more clarity on the eventual restructuring plans for the sector.

Away from developers, most other sectors performed well. Macau gaming was a bright spot in July after S&P upgraded Sands China and its parent company, Las Vegas Sands Corp to BBB- from BB+ with a stable outlook, citing the recovery in the Macau gaming sector. In S&P’s report, it was indicated that Macau’s gross gaming revenue (GGR) recovery accelerated in 2Q23, reaching 87% of the 2Q19 levels, and was above S&P’s full-year forecast of a 75%-85% recovery. This feeling that Macau’s activities were slowly returning to pre-pandemic levels raised sentiment across the whole sector with MGM, Wynn and Melco bonds also performing strongly during the month.

Another very strong sector was frontier sovereigns led by Pakistan which saw another 10% gain in bond prices across the curve for July. The improving sentiment came after the IMF announced that its executive board approved a USD 3bn equivalent, nine-month stand-by arrangement. This follows the announcement in June that it had reached a staff-level agreement on the aforementioned stand-by arrangement. Following the approval by the board, it allows for immediate disbursement of about USD 1.2bn, with the remaining amount to be phased over the program’s duration. As for the country, the next event to watch for is the upcoming general election which should be held less than 60 days after the dissolution of the National Assembly, which is slated for 13 August. The focus will be on whether the new government can adhere to the 2024 budget approved by the current government, which should enable the country to receive the remaining disbursement from the IMF. Pakistan has large debt maturity obligations over the next few years. The recent rebound in prices of the sovereign bonds over the past couple of months from 40 cents to a dollar to 60 cents to a dollar improves the chances that the company could reopen its USD bond financing channel, a key condition precedent to future timely repayments.

As with the overall Asian HY market, the JKC Asia Bond 2025 portfolio performance in July was predominantly dictated by the China property sector which although only accounting for ~10-15% of the fund continued to drag on performance and offset stable gains across most other segments. Clearly given the extremely bearish investor sentiment towards China property it will require large external forces to improve market dynamics in the form of major policy response, in our view. Although the Chinese government has announced many piecemeal policy tweaks over the past two years, they have done little so far to stabilize the distressed property developers debt servicing cash flows that largely make up most of the China HY market.  We therefore have to patiently wait for formal policy action to improve liquidity, the timing of which is very difficult to predict. Time will also be required for proper restructurings of defaulted names to be carried out.

Despite this market reliance on policy support which is out of our control we maintain a proactive approach to our fund strategy including the management of distressed names. We continue to monitor all positions carefully and consistently assess the merits of holding or trimming exposures on a case-by-case basis with the aim of maximizing over time returns and liquidity. 


                                                                           Source : Bloomberg, JKC – August 2023

The information and material provided herein do not in any case represent advice, offer, sollicitation or recommendation to invest in specific investments. 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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