Hayden Briscoe Head of Fixed Income, Global Emerging Markets and Asia Pacific at UBS Asset Management (UBS-AM) remains optimistic on China bonds even though regulations-induced market volatility has impacted investments in China. China onshore bonds1 were one of the few fixed income sub-asset classes which rallied in 2021, and equally importantly, it’s one of the few fixed income markets that did not sell off.
Khomsan Phalanusondhi, Executive Director & Chief Marketing and Product Officer at Asset Plus, is just as positive on China bonds as he believes current valuations present a compelling case, especially in the high yield space.
Most intense period of regulations
likely behind us
Hayden frames the regulatory changes in 2021 as part of the scene setting for China’s five-year plan. “There’s usually quite a bit of intensity when new regulations are implemented but I think the details will get ironed out. The economy has slowed as it adjusts but the government has been proactive in addressing this. Now it is refocusing on supporting new areas of growth and we’ve started to see some signs of increased activities.”
What this means for China bond markets
“There are two pieces to the puzzle here. There’s the onshore, domestic Renminbi (RMB)-denominated bonds and the offshore US Dollar (USD) issued ones,” adds Hayden.
“Investors are naturally quite apprehensive about this asset class given the negative news. However, this relates largely to US Dollar offshore China high yield bonds, especially those in the property sector.”
Hayden points out that what is less talked about is the stability of China RMB onshore bonds. He explained that they have not been as impacted during periods of global bond market volatility.
This is because China local bond prices are more influenced by domestic policies and economic conditions than global moves. At the moment, as central banks around the world look to raise interest rates, developed market bonds have sold off and could possibly be treading volatility for some time to come. In contrast, China has cut rates a few weeks ago and is not hiking rates aggressively.
“China onshore bonds did not sell off during challenging periods. It’s this bedrock of stability that investors need in their portfolios; the low correlation to global bond prices makes them good portfolio diversifiers,” explains Hayden
Khomsan also emphasises that the China onshore bond market is “a new world too huge to miss.” Indeed, it is currently the second largest bond market in the world after the US. However, global investors are still not holding enough of these bonds; China makes up only 7% of the total bond market2.
Hayden adds “But this is rapidly changing. The wall of money into China bonds is a strong, multi-year story as more investors are recognising their benefits.”
Is it time to dip into China high yield bonds?
The outlook for the offshore China high yield bond market could remain tough for some time as the property sector undergoes an adjustment period. Real estate bonds sold off viciously in the 2nd half of last year as the “Three Red Line” policy introduced by the government caused liquidity to dry up for some weaker developers, and some issuers missed coupon and principal bond payments.
But not all is lost for investors, as Hayden notes: “Tighter regulations will give investors a better outcome over the longer term as property companies pare down debt and strengthen their cash positions.” The government’s corporate debt ratio mandate requires property developers to take down their leverage and adjust their business models. It is also encouraging “common prosperity” and wants citizens to view “houses for living in, not for speculation”.
“Is it time? What I can tell you is we’re seeing large international investors being opportunistic with China high yield bonds. At the moment, these bonds are yielding an average of 17 %3 so for investors who can stomach some
near-term volatility and have a longer time horizon, the entry point now is very attractive.”
“We’ve seen many times in the past how stress points can create significant opportunity for total returns given current low valuations.”
Hayden added that a combined allocation to both China local bonds and high yield bonds could be optimal
for investors now.
Thai investors can gain easy access with the Asset Plus China Bond Fund (ASP-CHINABOND) which invests in both
China onshore and high yield bonds.
“China local bonds provide stability and are a strong diversifier to global markets,” highlights Khomsan. “China high yield bonds currently have attractive yields and provide potential capital upside.” He adds that majority allocation (40%-60%) will be to UBS-AM’s China onshore bond strategy.
BURB
CHINA ONSHORE BONDS DID NOT SELL OFF DURING CHALLENGING PERIODS. IT’S THIS BEDROCK OF STABILITY THAT INVESTORS NEED IN THEIR PORTFOLIOS; THE LOW CORRELATION TO GLOBAL BOND PRICES MAKES THEM GOOD PORTFOLIO DIVERSIFIERS.”
— Hayden Briscoe,
UBS Asset Management —
Asset Plus China Bond Fund (ASP-CHINABOND): IPO from 1-10 March 2022
• Invests in China onshore and offshore bonds
• Majority allocation to China onshore bonds for stability feature
• Attractive valuation on China high yield provides strong yield and potential capital upside over time
To learn more, contact your relationship manager at Asset Plus today
[Customercare@assetfund.co.th, Tel. 0 2672 1111] or scan the QR code.
1 Referenced to the Bloomberg China Aggregate Index (CNY) for calendar year 2021.
2 As measured by index representation in Bloomberg Global Aggregate Index, as of end December 2020.
3 Source: Bloomberg, based on the JACI China High Yield Index, as of 18 January 2022.
(Investors are advised to study product characteristics, returns and risks prior to investment. The offshore fund investments have no currency risk hedging. Currency risk policy
is at the discretion of the fund management. Investors may experience currency loss or profit or receive a return less than their initial investment.)