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November 2023

JKC Asia Bond 2025 – Fixed Maturity Fund November Update:    

  • Asian High Yield (HY) bonds continued to outperform Investment Grade (IG) bonds in October as the short duration bias of HY (particularly for the JKC Asia Bond 2025 fund) insulates exposure to US interest rate volatility.
  • US rates remained volatile in October with geopolitical tensions and resilient US data continuing to dominate macro themes.
  • China property bonds continued to drag on the Asian HY market in October as physical sales rebound disappoint despite recent aggressive government policy support, including the introduction of a RMB 1 trillion fiscal stimulus and the setting up of a state-backed stabilization fund.
  • Nevertheless, our minimal weighting to the China property sector (<6% of AUM) allows other better performing sectors (e.g. India and Indonesia) to more than offset losses in the real estate sector.
  • Chinese asset management companies (AMCs) were firm this month after companies including Huarong conducted open market buybacks of their bonds.
  • Meanwhile, Indonesian HY names such as Medco Energi and Bumi Serpong both launched tender offers for their USD bonds.
  • In India, mining conglomerate Vedanta continued to dominate headlines after a rating downgrade and news of its CFO stepping down.

US rates volatility remained elevated in October as geopolitical tensions stemming from the war in Gaza and resilient US data dominated the macro picture. In late October, US 10-year Treasury yields momentarily broke the 5% mark, a level last hit 16 years ago, before rallying back down to 4.85% at the close of the month. Market consensus is that there needs to be a catalyst, perhaps a sizable financial market stress or greater likelihood of weaker growth, before the US bond sell-off can reverse meaningfully. Meanwhile, the Fed continued to signal a November pause despite strong economic data, reflecting Jerome Powell’s view that the premium of Treasury bonds yields over Fed funds rates is sufficient to tighten financial conditions.

In China, policy makers remained reactive as headlines in October reported the introduction of a RMB 1 trillion fiscal stimulus package and the setting up of a state-backed stabilization fund to support the onshore stock market. These policies were in response to the weak economic data published in July and August. In addition, the Golden Week holiday consumption data were also mixed as softer MoM growth in industrial production and retail sales offset positive headline GDP figures for the third quarter. Meanwhile, property sales were softer than expected as preliminary sales data for the top 100 developers showed an increase of +9% MoM but a decrease of -4% YoY. Other property-related metrics continued to be weak as we saw a double-digit contraction in property investment, sales, and new starts despite the new rounds of property policy easing measures.

As such we did see continued weakness in Chinese property HY bonds in October, particularly Chinese property developer Gemdale Corp (which the fund has no exposure to), which saw its offshore bonds plunge more than 20 points after the company announced that its chairman resigned for health reasons. To further compound the weakness, it was rumoured that the developer was considering maturity extensions for its onshore bonds. The collapse of Gemdale Corp’s USD bonds saw contagion spread to some other ‘better-quality’ developers’ USD notes. For instance, investment grade-rated China Vanke (which the fund has no exposure to) saw its bonds collapse 30 points over the month of October.

Outside of the China property space, several companies have been conducting liability management exercises and using alternative funding channels to mitigate adverse credit events. For example, Hong Kong developer New World Development disclosed its plan to buy back its bonds. Other companies which have been active in buybacks include Chinese asset manager China Huarong (which the fund has exposure to) which recently disclosed that it had bought more than USD 900m of its USD bonds in the open market. Similarly, Indonesian HY issuers have also been conducting tender offers. Indonesian oil & gas company PT Medco announced last month tender offers across all of its four existing offshore bonds whilst concurrently issuing new bonds. Similarly, Indonesian developer Bumi Serpong launched a tender offer for its USD bonds due in 2025 at par.

In India, mining conglomerate Vedanta Resources continued to dominate headlines as it got downgraded by S&P to CCC from B- after having placed its rating on negative watch at the end of September. The company indicated that it was in advanced talks with multiple banks including Standard Chartered and JP Morgan to secure a USD 3bn refinancing facility to help the company avoid a default. This refinancing would be welcome as the company has over USD 3bn in bond repayments coming due next year and despite its cash flow having been recently boosted by generous dividend payouts by its subsidiaries. In its most recent call with an ad hoc group of holders of Vedanta USD bonds, the company said it aimed to complete talks with credit funds and banks for a USD 1.1bn – 1.2bn facility to finance the planned liability management exercise for three of its USD bonds. The company expects to launch a tender/exchange deal in early November once the funding is finalized.

In October JKC Asia Bond 2025 (USD share class) returned -0.67%, slightly beating the Asian HY index. This was mainly driven by our overall short duration exposure, our defensive exposure to the China property sector, and our overweight exposure to Indonesia and India (the best performing countries). Going forward we continue to review our exposure to high beta and distressed sectors factoring in the challenging environment for bond restructurings while maximizing returns from more stable sections of the Asian HY market.


                                                                           Source : Bloomberg, JKC – November 2023

The information and material provided herein do not in any case represent advice, offer, sollicitation or recommendation to invest in specific investments. 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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