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November 2022

JKC Asia Bond 2025 – Fixed Maturity Fund November 2022 Update:
  • After the sharp market collapse of October, Asian dollar bond markets staged an equally dramatic rebound in November

  • An astonishing 16% jump in the Asian HY index for the month is driven by China, and in particular by Chinese real estate bonds

  • Following months of underwhelming stimulus, Chinese authorities appear to finally get serious on supporting the troubled property sector

  • A 16-point recovery plan is followed by announcements from Chinese state-owned banks providing direct financial support for select developers

  • A lack of details on supporting defaulted issuers however leads to bifurcated performance in the sector

  • Adding to market optimism, Chinese authorities separately hint at potential relaxation on Zero Covid rules spurring strong grains for retail linked sectors including Macau gaming.

  • Gaining 9% in November, the lower beta JKC Asia Bond 2025 portfolio underperformed the HY index for the month but maintains significant YTD outperformance. 

In November 2022, the JKC Asia Bond 2025 fund produced a total return of 8.97%. This return was broken down by 76bps from carry, 829bps from bond price movements and -8bps from fees.

The performance of the Asian dollar fixed income markets in November was virtually a mirror image of October as both IG and HY bonds rallied strongly, more than recovering the losses of the previous month. For Asian HY paper, the rebound was particularly spectacular with a 16.1% jump in the Markit Asian HY dollar bond Index (IBXXAHBI Index) although these gains admittedly came from a low base as the Index had fallen 32% in the ten months leading up to the start of November. Consequently, while the monthly move did offset earlier losses, the market is still down significantly on the year.

The catalyst for the change in market fortunes came from multiple sources although a significant shift in sentiment towards the Chinese policy making was clearly a key factor. Multiple announcements regarding the country’s management of the Covid outbreak and related lockdowns as well as reports of material support for the beleaguered Chinese real estate sector were major factors. In fact, Chinese real estate bonds despite having just a 12% weighting of the HY Index at the start of the month, accounted for more than half of the Index gains over the month. Meanwhile, the Macau gaming sector, an industry highly sensitive to Covid policy, also made a substantial contribution to the rally.

Tighter credit spreads across the Asian market were further enhanced by a fall in US Treasury yields as investors began to anticipate a tapering of the Fed’s rate hike cycle, helped in part by a lower-than-expected monthly CPI number in the US. Consequently, long duration bonds for both IG and HY segments significantly outperformed the short end of the curve. A weaker USD both against other developed markets and most Asian currencies provided additional tailwinds to EM sentiment supporting the rally in Asian bonds. Notwithstanding this, the shift in China policy outlook was clearly the greatest influence on the Asian market rally as Asian CDS spreads played catch up after underperforming other parts of EM in October.

Although Chinese policies towards the property sector have been more positive in recent months, the actions so far have been generally piecemeal and ineffective. This appeared to change in mid-November after the central government unveiled an aggressive “16-point plan” to help stabilize the sector for both homebuyers and the companies developing the projects. Although the ambitious plan provided few quantitative details, the report was followed by multiple announcements from state banks declaring RMB1.275 trillion of credit lines to certain developers. This triggered a sharp rally in property bonds, especially those companies mentioned in the various bank lending reports. Subsequent announcements of equity fundraising plans (both onshore and offshore) helped broaden the rally with specific stock placements by Country Garden and Agile being notable examples. It was the first time in 20 years that Chinese authorities had announced a change in policy allowing property developers to raise financing via onshore equity placements. That was seen as another sign that the government was taking this stimulus more seriously.

One area where there still remains uncertainty for the sector is how the government will help already defaulted companies manage their restructurings. Since they now represent the majority of offshore property bonds, clarity in this matter is still critical to the overall recovery story of the Asian HY market, in our view.

Adding to the positive halo effect of the improved property sector support was reports that the Chinese government was considering a relaxation of its aggressive Covid lockdown policies.  Although reports of anti-lockdown protests across the country dominated the headlines in western media, we suspect the main driver of this potential change in government stance towards its “dynamic-zero-Covid” policy was the economy and a notable sharp slowdown in key economic metrics such as consumer sentiment, PMIs and exports. Indeed, the government had already begun softening its Covid containment rhetoric before the onshore protests began despite actual Covid cases in the country spiking to a record high level in the month. In a rare public briefing by the Chinese health ministry in late November, the authorities highlighted an accelerated effort to raise vaccination of the elderly which has been one of the key impediments to the country’s Covid management to date.

The prospect of a possible end of Covid lockdowns further fueled the market rally for Chinese equity and bond markets in November with sensitive sectors such as retail and Macau gaming strongly benefitting. The Macau gaming sector was additionally buoyed by news that the Macau government had approved a 10-year license renewal of the six incumbent operators, hence removing a major overhang for the sector.

The JKC Asian Bond 2025 portfolio benefitted from the improved market sentiment to achieve a 9% gain over the month. The portfolio lagged the overall market rally since it has a lower beta compared to the index due to its structurally shorter duration given its 2025 end maturity date. Nevertheless, the portfolio continues to exhibit a significant outperformance vs the Index and peer HY funds on both a 1-year and 3-year track-record.  During the month of November, we continued our rebalancing strategy of selling shorter dated 2023 paper into 2024/25 bonds if and where the yield improvement is justified. As of month-end, more than 50% of the fund will mature beyond December 2023. We will continue to raise this number going forward. We also reduced the fund’s cash weighting to better capitalise on the market rebound. We will continue to watch the prospects of the Asian market carefully and the outlook for the China property sector. Although we have turned more positive on certain developers that have clearly demonstrated a degree of onshore bank support we still await a government plan with regard to helping the restructuring of defaulted names as it is more important to the long term outlook for the whole Asian HY asset class.

The information contained herein is issued by JK Capital Management Limited. To the best of itsĀ  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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