Wonnie Chu, managing director of fixed income at Gao Teng Asset Management, believes Asian bonds will benefit from the macro-economic situation in 2020.
Asian fixed income, which has comparatively high yields, should continue to benefit from a slow growth, low inflation environment.
“The increased share of negative interest rate bonds will continue to attract inflow to Asia due to its high absolute yield,” she told FSA.
Valuations are not high, she continued, and the quality of growth and fundamentals of Asian countries has improved significantly the past few years, driven by middle class consumption.
Gao Teng joins a list of asset managers who are positive on Asia bonds this year.
Property bond tilt
Gao Teng is the Hong Kong-based joint venture between internet giant Tencent and Beijing-based Hillhouse Capital Group. Hillhouse has $20bn in AUM and specialises in alternative assets such as hedge funds and private equity investments.
Chu manages the Gao Teng Asian Income Fund whose top exposure is corporate investment grade bonds with BBB- the average rating. Real estate (28.9%) is the top sector, followed by financials (22.2%), according t0 the fund factsheet.
She has a preference for Chinese high yield property names (offshore), especially the quality mid-cap market consolidators with improving credit trend.
“We were underweight China last year, but have more exposure this year because the property policy is loosening a bit and the government is also improving the funding conditions for private enterprises by lowering the funding cost and this situation can support the performance of Chinese credit,” Chu said.
India, however, gets an underweight due to the government struggling with reforms. Moreover, the country is an importer of oil and the potential for rising oil prices are a headwind.
Indonesia was an overweight last year, “but this year we are just waiting out the market because the valuation is kind of expensive now and the yield of Indonesia over China is much higher. It used to be about 150 bp but now it’s tightened down to around less than 100 bp”.
Risks in 2020
In a note to investors, Chu said “the [industry] consensus risk-on trade makes us a bit uncomfortable” and said the firm is “upbeat but cautious”. She cited several risks that could impact her investment thesis. For example, record bond defaults in China last year could worsen and create negative investor sentiment toward the whole Asian bond market.
Moreover, any escalation of the US-China trade dispute could impact Asia bonds, she said. Asian countries are in China’s supply chain and some key exporters have been hit by the high tariffs.
The signing of a phase one deal today between the countries at least suggests that the tariffs war is unlikely to worsen, Chu said.
Several asset managers, for example JP Morgan Asset Management, also look beyond the phase one deal to warn that contentious issues are far from over.
“Markets seemed to take this deal as a risk-on signal, and we should all be aware that headlines about trade, particularly US-China trade, are going to be a constant feature of 2020 and markets will likely continue to price in an elevated risk premium, which could be a source of volatility throughout 2020,” Hannah Anderson, global markets strategist at JP Morgan AM said in a client note.
Likewise, Moody’s said there remains “considerable scope for friction between the two sides”.
