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

• The overall global risk sentiment remained firm in February despite a potential delay in the onset of the Fed tightening cycle due to stronger than expected US inflation
• Poor investor sentiment in China reversed after the government announced a series of measures to stabilize the domestic equity market
• An unexpected 25bps cut in the China 5-year loan prime rate further underpinned the market recovery
• In Asian High Yield (HY), longer duration bonds outperformed with Pakistan, China property and China industrials being the best performing sectors
• Within China, property non-distressed names led the advance as defaulted bonds continue to see little investor demand
• Elections results in Indonesia and Pakistan: the latter saw greater gains as IMF negotiations continue to progress
• In March, the China NPC “Two sessions” political conference will be the key focus

Global risk assets kept on surfing on a strong momentum in February despite the January US CPI print surprising to the upside amid a continued tight labour market and a resilient economy. The CPI report, which was released in mid-February, marked a 0.3% MoM increase in January which was a slight acceleration from the 0.2% rise observed in December. This incremental rise was unwelcome news for rates markets, as it reduces the chance of an earlier rate cut by the Fed. Still, we believe the market’s directional view about an easing path remains intact and the only question remains when the Fed will begin the rate cutting cycle. Indeed, several Wall Street economists revised their forecasts about the FOMC’s first rate cut to June (from May) which caused Treasury yields to sell off across the curve. Over the month, the 2-year and the 10-year US Treasury yields increased by +41bps and +34bps respectively.  

Despite these negative moves in Treasuries, Asian credit spreads remained resilient to US rates. It can largely be attributed to stable fundamentals and healthy technicals. New issues in both Investment Grade (IG) and High Yield (HY) markets have been lackluster since the start of the year as it appears many corporates would rather wait for yields to decline before locking in new financing, which in turn has kept credit spreads on a tightening bias. The long duration HY bonds recorded positive returns during the month, extending the rebound that started in early November last year.

Within Asia the best performing sector was once again Pakistan’s sovereign debt, followed by strong gains in China property and China industrial bonds. China initially started the month weakly as benchmark onshore and offshore equity indices slumped to multi-year lows. However, sentiment rapidly changed when the government announced several measures to help stabilize the equity market as well as more indication of measures to help fuel property demand. Later, the PBoC announced its biggest-ever cut to the 5-year loan prime rate (LPR) which helped sustain the rebound. The gains were mostly focused on non-defaulted property names, as the distressed segment of the market continued to be dogged by a lack of progress in restructurings. For instance, Shenzhen-based trade and logistics center operator and homebuilder China South City defaulted on its USD bonds after its largest shareholder, state-owned company Shenzhen SEZ Construction and Development Group, said it would not provide any financial support to the developer. The bonds dropped around 10-15 points. Disgruntled bondholders are currently planning to form an ad-hoc group to sue the Shenzhen SOE to recover payments owed to creditors under a keepwell provision. Nevertheless, non-defaulted names saw good gains after Yanlord and GLP announced having fully redeemed USD bonds that matured in February.

Away from China, politics dominated headlines. In Indonesia, the country held its presidential elections and saw a first-round win for Prabowo Subianto who was supported by the incumbent Joko Widodo. Indonesian HY corporates have experienced some strong performance over the past six months as several issuers conducted tender offers for their outstanding bonds using proceeds from onshore loans. We expect this positive trend to carry on after the election as the new presidency should result in a period of policy continuity for Indonesia.

Meanwhile Pakistan also held an election in early February which delivered a surprise result with independent candidates (largely backed by the PTI) taking the most seats (101 seats), but still being short of the 134 votes needed to be in the position to name the Prime Minister. On the other hand, the opposing parties, PNL-N and PPP were weaker than expected but agreed to form a coalition government, and ended up nominating Shebhaz Sharif as their Prime Minister, defeating the PTI. Despite the surprise outcome, Pakistan sovereign bonds continued to rally as the newly-elected government will soon engage with the IMF and negotiate another financing package as part of its FY25 budget planning. That would provide external inflows while expanding talks with its bilateral lenders. 

The JKC Asia Bond 2025 (USD share class) fund posted a negative return of -0.71% in February that was driven by the technical one-off impact of a swing price which will be immediately reversed in March. From a market perspective, the key event to monitor in the month ahead will be in China when the National People’s Congress (NPC) hosts its annual “Two Sessions” party conference. Hopefully it will provide us with a clearer picture of the fiscal and monetary policy tools the government will employ to stabilize the property sector and reduce its drag on the economy in the year ahead.