JKC Asia Bond 2025 – Fixed Maturity Fund July 2023 Update:

• The month of June saw global risk sentiment improve incrementally in anticipation of an increase in China stimulus and fading worries about the Fed hiking rates more than twice this year and about a US recession

• Meanwhile Asia HY markets rebounded off the lows in May driven largely by Emerging Asia Sovereign credits in Pakistan and Philippines

• Volatility in the China HY Property sector continued following the announcement that Henan-based developer Central China Real Estate (CCRE) will suspend payments to all offshore creditors

• In contrast Asian HY credits outside of China held up well with Macau gaming concessionaire bonds on stable footing after gaming revenues rose by 435.5% YoY in June to almost USD 5.4bn

In June 2023, the JKC Asia Bond 2025 fund produced a total return of +0.32% taking the year-to-date return to -5.75%. Global investor sentiment was on more solid footing this month after the FOMC kept policy rates unchanged, which was in line with market expectations and earlier Fed communication. In addition, investors largely interpreted the Fed statement and Chair Powell’s comments as dovish, with the chairman saying it would be appropriate to moderate the pace of hikes as the fed funds rate is approaching the projected terminal rate. As such, and based on Fed funds future rates, the market is indeed pricing in two more 25 bp Fed rate hikes before the end of the year. This is despite various macro indicators such as activity levels and employment levels being more resilient than previously expected. Meanwhile back in China, investors were also buoyed by the rising odds of a China stimulus as the Chinese government is expected to respond to the weak macroeconomic backdrop by rolling out a broad stimulus package in the coming months targeted at the property, consumption and infrastructure sectors. This came after announcements made by the State Council that it was studying new measures to boost the economy alongside the PBOC cutting its one-year and five-year loan prime rate (LPR) by 10 bps from 3.65% to 3.55%. Nevertheless, we do believe the excitement should be viewed with moderation as the efficacy and the timing of any new policies remain uncertain.

While the Chinese property sector has been touted as one of the areas of focus for government policy stimulus, Chinese HY property bonds continue to experience bouts of volatility following a suspension of payments by one more developer. Henan-based developer Central China Real Estate announced in late June that it will suspend payments to all offshore creditors only a few months after completing an exchange offer for three of its USD bond tranches due in 2023. As such, we saw once again the risk of default weigh heavy across other performing developers in the HY space as investors have concluded that even though many of these private developers have been conducting exchange offers for their bonds, the risk of further defaults is not eliminated. Hence, we remain very cautious on the current situation and will closely monitor any new policy stimulus from Beijing.

On the other hand, the Macau gaming sector has been one key beneficiaries of the China reopening with the gaming concessionaires’ bonds outperforming the wider Asian HY market last month. This was largely driven by the strong recovery in gross gaming revenue (GGR) for the sector, which rose by 435.5% YoY to USD 5.63bn according to Macau’s Gaming Inspection and Coordination Bureau. However, this figure remains 37.9% below the pre-pandemic 2Q19 levels as visitor arrivals have not fully recovered to pre-pandemic levels.

Meanwhile, the non-China space once again outperformed the Asian HY markets led by Pakistan’s sovereign bonds as the country reached a crucial agreement with the IMF in late June for a USD3bn nine-month stand-by agreement. As such Pakistan’s bonds were up around 8 points after the announcements despite very few details having been made public about the deal. In addition, a much-anticipated haircut on the bonds has yet to be announced by both parties despite the positive reaction to the news by investors. Similarly, Sri Lankan sovereign bonds also had a strong month of June after the Sri Lankan finance minister proposed to international bond investors a haircut of 30%, a figure which was lower than expected, with a repayment term of six years at a 4% coupon. The same terms were offered to domestic bondholders, which was a surprise as USD bondholders were expecting to suffer from a bigger haircut than local creditors.

As with the overall Asian HY market, the JKC Asia Bond 2025 portfolio performance in June was predominantly dictated by the China property sector which although only accounting for ~17% of the fund continued to drag on performance and offset stable gains across most other segments. Given the extremely bearish investor sentiment towards the China property sector, it will require large external forces to improve market dynamics in the form of a major policy response. Although the Chinese government has announced many piecemeal policy tweaks in the past two years, these have done little so far to stabilise the cash flows used for debt servicing of those distressed property developers that make up most of the China HY market.  We must 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 to maximise the fund’s return and liquidity.