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July 2024

JKC Asia Bond 2025 – Fixed Maturity Fund July 2024 Update:

  • Asian credit markets produced steady gains in June helped by lower US Treasury yields and stable credit spreads
  • Uncertainty remains over the timing of Fed rate cuts as US data remain quite resilient
  • Surprise snap elections in France and rising popularity of hard right parties in Europe created some weakness in the EUR and a flight to safety towards USD assets
  • Currency weakness (vs USD) was also seen in Asia as JPY, INR and IDR all dropped to new lows
  • JKC Asia Bond 2025 (+0.59% in June) however continued to exhibit highly stable returns through the month as short duration limits the impact of external market forces
  • Indonesia and India were the portfolio’s best performing sectors in June
  • Indonesian USD high yield (HY) bonds gained on the back of more tenders announced across the asset class
  • The Indian market meanwhile resumed positive upward trajectory as post-election volatility proved short lived
  • Going into July a lot of focus will be on the Third Plenum of the China Central Committee which suggests potential stimulus announcements for the weak economy

It was a positive month for Asian dollar bond markets as lower US Treasury yields and largely unchanged credit spreads underpinned steady gains across all geographies. Notwithstanding political instability in Europe and a rally in the USD, Asian credits spreads showed remarkable resilience while the higher carry of HY bonds allowed a marginal outperformance vs investment grade (IG) counterparts. JKC Asia Bond 2025 produced a steady positive gain (+0.59%) reflecting the short duration as performance is now largely dictated by pull-to-par price moves and carry.

 

Admittedly it was a volatile month for US Treasury markets as there remained continued inflationary strength in the US labour market (May’s non-farm payrolls at 272,000 beat expectations). There were signs that the FOMC may be looking to further delay US rate cuts, as seen through the June Fed meeting dots chart. However, a sudden outbreak of political upheaval in Europe saw global investors rush back to the safety of US Treasuries. In the end, yields declined over the month (the 2yr and 10yr US Treasury yields falling -12bp and -10bps respectively in June).

 

In global credit, Europe dominated the headlines as a series of surprise victories from hard right-wing parties in European elections raised concerns on the future of the European Union. This was thrown into further chaos after French president Macron stunned markets by calling a snap election for the French parliament. With hard right and hard left parties leading the polls, this signaled an outlook of significant political uncertainty for the EU’s second largest economy. French government OAT yields spiked taking the spread of the France vs Germany 10yr bonds above 80bps for the first time since the 2011 European debt crisis. Meanwhile the iTraxx Europe credit index widened by 10bps. However, the mini crisis appeared isolated to Europe as Asian credit markets were generally little affected by the moves.

 

More concerning for Asia was the resurgence of US dollar strength on the back of the European situation which was exacerbated by further weakness in Asian currencies led by the Japanese yen which fell to a 38-year low against the USD after the Bank of Japan kept rates unchanged at its June meeting. The Indonesian rupiah and the Indian rupee also hit all-time lows against the dollar in June, creating a headache for the Bank of Indonesia as the weak Rupiah is pushing the central bank to hike rates at a time when there are visible signs of a slowing of the economy. 

 

In China, the currency also drifted lower in June, but attention remained firmly fixed on the domestic economy as investors closely watch to see if the aggressive loosening policies in the property market announced in May are having an impact on the physical market. Early signs remain mixed, and the market was highly disappointed by weak data in early June although we would argue it would probably take a few months for the measures to take effect. Nevertheless, credit markets grow increasingly impatient with China Vanke (VNKRLE), one of the last remaining bellwether private developers, having had a weak month in June (the VNKRLE 29 was down by 6 percentage points), erasing some of its May gains.

 

For JKC Asia Bond 2025, the best performing sectors were Indonesia and India. Despite the weakness in the Indonesian economy, HY bonds from the country are getting a boost from a series of early tenders and exercise of call options in the property sector as companies concerned about the weakening currency have looked to retire their dollar bonds early to reduce further foreign currency losses. We have seen two tenders among our holdings (ASRIIJ and LPKRIJ) while a third (KIJAIJ) has rallied on improved scarcity value. In India, the surprise election results that saw Narendra Modi losing control of the lower house of the parliament had a short-lived impact with both equity and bond markets resuming their uptrend in late June. India, which has a 20% weighting in our portfolio, saw broad based gains across all sectors.

 

Going into July we expect overall market activity to slow down for the summer break, but focus will likely remain on the Chinese economy. Firstly, the June property contract sales statistics to be released in early July will give us insight into the first full month following the real estate policy announcements in May. However, more importantly, the China Central Committee of the CCP will host its Third Plenum on July 15-18. The market anticipates there could be some announcements about major economic reform measures to stem the weak consumer sentiment and ease concerns over the servicing of municipal debt as land sales are less than half of what they were two years ago. We will closely monitor any developments although the short-duration nature of the fund alongside its highly diversified positioning should continue to reduce the overall volatility of performance.

Monthly Performance

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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