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Bullish Invesco positions bond fund for trade deal

A perfect storm of a US-China tariff deal, renminbi appreciation, investment inflows and domestic reforms will drive Chinese bond prices higher, according to co-manager of the Invesco Asian Bond Fund.
Ken Hu, Invesco

“The markets have not factored in that the US and China are likely to reach an accord on their trade dispute as early as this month, and that one of the major concessions by China will be to allow the renminbi to appreciate,” Ken Hu, who co-manages the $412m fund, told FSA in an interview.

He pointed to recent indications from official sources that China will agree to buy US energy and agricultural products and to speculation that the two countries will negotiate for the remninbi a so-called “Plaza Accord 1.5”  – a reference to the 1985 agreement to depreciate the US dollar signed at the Plaza Hotel, New York City.

“Both developments will lead to lower inflation which should attract foreign inflows into the domestic capital markets. Inflows will be further boosted by the inclusion of China government and policy bank bonds in the benchmark Bloomberg Barclays Global Aggregate Index,” said Hu.

He estimates that foreign ownership of the $13trn China government bond market will rise to 13% from less than 3% within the year.

“Yields on 1o-year bonds are 90 basis points (bps) higher than US treasury notes, the renminbi should appreciate by 5% to 10% and, compared with other government bond markets, foreign ownership is under-represented.”

Meanwhile, Hu expects the formerly entrenched house registration (“hukou”) system to be relaxed in inland third tier cities with populations of less than three million.

“This will spur property prices higher and encourage investment into the infrastructure sector,” he said.

Hu’s bullish attitude towards China is reflected in the composition of his Asian Bond Fund, which has a 73% allocation to Chinese issues.

However, he recognises greater relative value among US dollar-denominated bonds, where yields are around 100bps higher than renminbi-denominated issues from similar real estate and local government borrowers.

The fund has earned an 11.08% three-year cumulative return, outperforming the Asia-Pacific fixed income sector average, according to FE Analytics, and producing a better return than its benchmark Markit iBoxx ALBI index, according to the fund’s factsheet.

Its annualised volatility (3.26%) is high compared with the average in its category (2.68%), and it suffered during the downturn in Asia bond prices in the second half of 2018, declining 6.25% in the calendar year. The fund has subsequently recovered, and is up 7.18% in the year-to-1 May.

In addition to its heavy exposure to Chinese bonds, the fund also has core holdings in dollar-denominated sovereign issues from Papua New Guinea, Mongolia and the Maldives.

Invesco Asian Bond Fund vs Asia Pacific fixed income sector average

Source: FE Analytics. Three-year cumulative performance in US dollars. Data for the fund’s benchmark Markit iBoxx ALBI index is unavailable.

Part of the Mark Allen Group.