Posted inFixed Income

Ninety One finds value in China bonds

China’s fixed income market offers defensive assets with attractive returns amid equity market volatility.
Alan Siow, Ninety One

China fixed income provides diversification benefits, attractive yields and low risk in a year when Chinese equity markets have suffered high volatility, according to Alan Siow, fund manager at Ninety One.

“Chinese bonds come in two main flavours: the onshore renminbi bond market and the offshore dollar bond market. We provide all of that in one package, hedge back to renminbi so that the client or the end investor gets renminbi exposure,” Siow told FSA.

The Ninety One All China Bond Fund invests across the whole universe of onshore renminbi bonds and offshore dollar bonds.

The strategy has a bottom-up driven approach, which is integrated with a macro perspective.

The $958.3m fund has posted a 22.21% three-year cumulative return in US dollars, outperforming its sector average (13.71%), according to FE Fundinfo

Its holdings of China onshore government bonds is high, at around 60% to 70% of the fund.

“Chinese sovereign bonds offer attractive yields compared with European countries or the US,” Siow said.

The yield of a five-year Chinese government bond ranges between 3% to 3.5%,  which is double the yield of the 10-year US treasury note, with half the duration.

To increase the return, the fund also has exposure to Chinese US dollar-denominated corporate bonds. Major sector allocations are to financials, real-estate, and some utilities.

Although the fund has invested in the real-estate sector, it does not hold any Evergrande bonds. Siow believes that the country’s largest property developer is in trouble because of the decisions it has made, not because of wider problems in China’s property sector.

“We expect Evergrande will not be able to make all of its debt payments on time. After the default the government will ensure that the restructuring of Evergrande takes place in a controlled manner.”

Going forward Siow believes there will be more opportunities within the ESG universe. As China is transitioning towards carbon neutral by 2060, there will be a lot of supply of green bonds, particularly in the property and utility space, he said.

Ninety One All China Bond vs sector average

FE Fundinfo. Three-year cumulative returns in US dollars

Part of the Mark Allen Group.