We have been anticipating a stronger USD and higher US interest rate scenario for some time. An easing liquidity environment in China could reduce company financial stress. Our overall conservative investment outlook is unchanged.
We continue to recommend that investors reduce/avoid longer duration (<10yr) fixed coupon IG bond exposure as well as fixed-for-life corporate hybrid/perps. We believe shorter-to-medium dated duration (3-7yr) IG bonds would offer more protection against a rising interest rate scenario. We are also generally cautious on EM debt in the market environment.
Within the context of the China property sector, some market participants including ourselves are pondering whether we would be seeing some “light at the end of the tunnel” in the months ahead. Some of the signs we have been looking for are now occurring and we would monitor these developments in the months ahead whether it warrants a move from being sector underweight to at least market weight, pending these developments.
REVIEW OF MACRO ENVIRONMENT
The 2yr US Treasury (UST) yield continues to rise (widen) as the most sensitive UST to Fed policy. While higher rates are outright expected, there is a growing divergence in the market on the trajectory and number of expected Fed hikes (3 to 7) in 2022.
China Govt Bond (CGB) yields continued to lower (tighten) across its yield curve in expectation of ongoing targeted liquidity loosening in the Chinese economy.
ASIAN HIGH YIELD (HY) HIGHLIGHTS
China property HY was the overall “dog” in the Asian USD credit universe. The market had to put up with negative newsflow ranging from additional off-balance sheet debt rumours, specific credit default matters and auditor resignations (in the case of Hopson).
The saving grace in the sector came from expected targeted liquidity, successful offshore convertible bond deals, as well as government announcements to potentially allow increased usage of trapped project-level escrow funds.
The major specific underperformers were 2023 (and beyond) bonds from peripheral names such as Golden Wheel and Dafa Properties but also extended to names such as Times China, Guangzhou R&F, Agile, Shimao and Logan. The outperformers in the sector were China South City (after its successful consent solicitation exercise) and 2022 maturing bonds from Agile, Zhenro and Redsun.
ASIAN INVESTMENT GRADE (IG) HIGHLIGHTS
Long-dated bonds from Indonesia such as the sovereign and quasi-sovereigns such as PLN and Inalum, as well as Indofood were the major underperformers. Not too far behind were the long-dated bonds from Greater China and South Asian issuers, to name a few, Chexim, Airport Authority of Hong Kong, Thai Oil, among others.
In the crossover China property space, the mid-to-long maturities of Country Garden underperformed.
IG outperformers were mainly limited to a handful of short-to-medium maturity bonds from China Shuifa, Kogas and a handful of peripheral Chinese LGFVs.