JKC Asia Bond 2025 – Fixed Maturity Fund December 2024 Update

• A mixed month for Asian bonds as IG and HY sectors saw contrasting performances
• The Asian IG index saw gains from long duration names as long dated US Treasury yields fell…
• …however Asian HY underperformed as we saw a rise in risk premiums led by renewed weakness in the China property sector.
• The US election win for Trump will likely keep markets volatile in the near term as risks of rising inflation resurface while tariff threats will overhang Asian markets
• The China stimulus announcement in November which focused on a debt swap rather than on direct help to Chinese consumers disappointed some segments of the market
• The JKC Asia Bond 2025’s performance was flat over the month and outperformed Asian HY mostly on account of low exposure to China property
• The Asian HY market was also dragged down by management issues at Adani and New World groups (in which the fund has no position)

November saw a mixed performance for Asian USD bonds as a pullback in US Treasury yields helped drive a recovery for long duration investment grade (IG) assets although concerns over risk premiums for Asian credit weighed on the high yield sector. It was always expected to be a volatile month on the geopolitical front given the uncertainty going into the US elections on November 5th. However, the emphatic nature of the election win for Trump and the clean sweep for the Republican party still came as a surprise. This has naturally raised the spectre of extremely hawkish trade policies from the US in 2025 with China an obvious target given the massive US trade deficit with this country. Meanwhile China’s own economic concerns failed to dissipate as the country’s own fiscal stimulus announcement which was broadly in line with guidance still appeared to disappoint many market observers as demonstrated by the 4.4% drop in the MSCI China equity index for the month.

On November 8th China’s National People’s Congress and Finance Ministry held a press conference after the week-long meeting of the country’s top legislative body to unveil fiscal plans of the government following monetary stimulus announcements issued the previous month. This had been long anticipated given the government’s signaled intention to re-invigorate the economy that is still weighed down by the 2021-23 property crisis and by the consequences of the Covid lockdowns. At the centre of the announcement there were measures to engage a CNY10 trillion debt swap for provincial and municipal governments to reduce liabilities held by so-called opaque local government financing vehicles (LGFVs), and to swap these into more conventional local government issued bonds. China has conducted such schemes in the past, but this time would be the largest debt swap to date. In theory the rationale for the plan was to improve transparency and accountability of local government finances and therefore lower the debt servicing cost burden of local governments. It is hoped this would also free up capital at state banks to provide additional funding to stimulate the economy, and particularly the real estate sector.

Interestingly the reaction to these announcements were quite mixed. Although the plan was broadly in line with previous government guidance, some foreign investors were clearly disappointed the debt swap was not accompanied by direct fiscal stimulus for Chinese consumers. The threat of a possible slowdown in external trade with the US next year also exacerbates these concerns. In contrast domestic investors appeared a lot more sanguine with the plan buoyed by the signs of some grass roots recovery in property and retail sales in the past month. This contrast was very evident in the equity market as foreign held H-shares as shown by the Hang Seng Composite Index fell -3.4% in November while largely locally held domestic A-Shares as measured by the Shanghai Composite index climbed +1.4% over the same period.

Chinese dollar credit was also mixed in November. Although IG bonds saw broad-based gains helped mostly by falling US Treasuries yields, a drop in property names (particularly bellwethers Vanke and Longfor) led to an underperformance of the high yield sector. Indeed, the IG heavy ADBI Index saw a return of +0.56% in the month while the HY focused AHBI lost -0.50% over the same period.

In terms of US Treasuries’ performance, yields generally continued to climb for most of the month with the 2-year US Treasury yield hitting a 4-month high of 4.38% mid-month before a sharp drop at the end of the month brought yields back to unchanged. There continues to be a great deal of debate about the extent to which incoming president Trump’s fiscal policies will be inflationary for the US economy. While it is impossible to answer this question until he takes office next year, it is clear the new administration will be fast and proactive in setting its policy agenda as shown by the list of hawkish cabinet appointees. We expect US Treasury yields to remain quite volatile in the near term. The markets uncertainty is further demonstrated by the pricing of a 66% chance of a 25bps rate cut this month, and we agree it could swing either way.

As far as Asia is concerned, the biggest issue for next year will be regarding trade tariffs. We expect an aggressive negotiating position from the US while the previous Chinese way of ‘friend shoring’ manufacturing to other parts of Asia to circumvent US import tariffs is likely to be less successful than it was during the 2016-2020 period. However, we think the inflationary implications of trade barriers will almost certainly see Trump water down his most extreme tariff threats against China and the rest of Asia. Meanwhile, the impact of tariffs on Asian USD bonds is unlikely to be significant given the lack of issuers from directly affected sectors.

In November the JKC Asia Bond 2025 fund saw a flat return. Our steady accruals and low exposure to the underperforming China real estate sector helped support our performance. In addition, our lack of any position in either Adani Group bonds (which fell on account of a US indictment of group Chairman Gautam Adani) or New Word Group bond (falling on account of the surprise resignation of its CEO) helped us handily outperform the HY index. Admittedly our gains were tempered by the write down of Pan Brothers (PBRXIJ) as the restructuring of this bond announced in November proved to be less investors friendly than previously hoped. Although this bond had already been written down significantly in the fund two years ago we took the decision to prudently further reduce our marked price.