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Stratton Street: Why investors can’t ignore China bonds

The inclusion of China bonds in global indices will have huge implications for asset managers, according to Andy Seaman, Stratton Street Capital’s London-based partner and chief investment officer.

“China is the third biggest bond market in the world, and it is underrepresented in the global bond indices. But that’s going to change soon,” Seaman told FSA.

In March, Citi announced that it would include China in its emerging market and regional government bond indices, as reported. Its three indices, the Emerging Markets Global Bond Index, the Asian Government Bond Index and the Asia Pacific Government Bond, will include Chinese government bonds starting in February next year.

Besides Citi, Bloomberg Barclays also launched two new indices to include Chinese sovereigns: the Global Aggregate + China Index and the Emerging Market Local Currency Government + China Index.

Seaman said that that the inclusion would have huge implications for fund managers in the future.

According to him, if, for example, the renminbi were to appreciate against the dollar, anyone following the old global aggregate index will significantly underperform those managers who are following the new one. 

“Most people haven’t appreciated the scale of the demand for the renminbi in the future, and that is something to keep an eye on,” he said.

China sovereigns

Seaman has a positive view on China bonds given the country’s sovereign credit quality. 

China sovereigns are AA rated and the state has accumulated huge amounts of overseas assets over the years, which helps improve its overall credit quality, he said. 

Seaman likes quasi-sovereign bonds.

“These are large liquid issues, which have links to the government. They are not guaranteed by the government in all cases, but they have strong government support,” he said, adding that the spreads they offer are very attractive.

In terms of risk, he believes that China may not be as vulnerable to US protectionist policies as investors may believe. 

“It is undoubtedly true that imposing tariffs would be bad for global trade, and by extension, bad for global growth,” Seaman said. “But it is not clear who will be the winners and losers.” 

Investors may think that US manufacturers will benefit from higher import tariffs on foreign goods.

“But that doesn’t seem to be a likely outcome. If trade with the US is going to be more difficult, countries around the world are actually going to have to look elsewhere,” he said. “So somewhat strangely, China could end up being a beneficiary of all this if [President] Trump adopts policies that he has suggested.”

Seaman added that as China shifts from an export-led economy to one dominated by domestic consumption, it is likely to import more from the West, which makes it a very important trade partner for a lot of countries.

Qatar and China bonds

One of the firm’s funds, the Renminbi Bond fund, has China as its second largest country allocation (19.37%), just next to Qatar (24.22%), according to the fund’s factsheet. 

Two other funds, the Next Generation Bond Fund and the NFA Global Bond Fund, also have China as the second largest allocation, at around 10-13%. Like the Renminbi Bond Fund, their weighting on Qatar is the highest, at around 20%.

The three funds are available to high-net-worth individuals and institutional investors in Hong Kong and Singapore, according to the firm.

The reason for Qatar’s huge allocation is a preference for wealthy countries, Seaman said.

“Think about the yields available in some of the most heavily- indebted European governments,” he said, citing Spain’s debt to foreign investors as an example.

“Yet the yield is less on a lot of their bonds than Qatari spreads at the long end, so that’s why we favour these very wealthy countries that could afford to pay us back,” he said.

He added that investors may find more value in Middle East bonds more than other parts of Asia.

“A lot of the bonds are quite expensive in the Far East relative to countries in the Middle East, where you can get a AA credit on spreads of 150 over. That is tremendous value,” he said. 

At the moment, Qatar’s sovereign credit rating is AA like China’s, but Seaman believes it should be AAA. “But because there’s a bias against countries in that region, it only has a AA rating today.” 

He said that Qatar is the wealthiest country in the world in terms of GDP per head, but a lot of people would classify it as an emerging market economy, even if it has three times the income of the UK.

“So if Qatar is considered emerging, where does that put the UK?,” he said.

Besides Qatar, other countries in the Middle East that offer value are Abu Dhabi and Oman, he added.

The three-year performance ending March of Stratton Street’s Renminbi Bond Fund versus its sector, according to FE Analytics.

The fund outperformed the sector and returned more than 10% during the period. It is, however, far more volatile than sector. Its three-year cumulative volatility is 8.48% compared to the sector (4.76%), according to FE data.


The fund’s NAV and sector performance have been converted to US dollars


Part of the Mark Allen Group.