Please read the following important information for First Sentier Asian Quality Bond Fund
• The Fund invests primarily in debt securities of governments or quasi-government organization in Asia and/or issuers organised, headquartered or having their primary business operations in Asia.
• The Fund’s investments may be concentrated in a single, small number of countries or specific region which may have higher volatility or greater loss of capital than more diversified portfolios.
• The Fund invests in emerging markets which may have increased risks than developed markets including liquidity risk, currency risk/control, political and economic uncertainties, high degree of volatility, settlement risk and custody risk.
• The Fund invests in sovereign debt securities which are exposed to political, social and economic risks. The Fund may also expose to RMB currency and conversion risk.
• The Fund invests in debts or fixed income securities which may be subject to credit, interest rate, currency and credit rating reliability risks which would negatively affect its value. Investment grade securities may be subject to risk of being downgraded and the value of the Fund may be adversely affected. The Fund may invest in below investment grade, unrated debt securities which exposes to greater volatility risk, default risk and price changes due to change in the issuer's creditworthiness.
• The Fund may use FDIs for hedging and efficient portfolio management purposes, which may subject the Fund to additional liquidity, valuation, counterparty and over the counter transaction risks.
• For certain share classes, the Fund may at its discretion pay dividend out of capital or pay fees and expenses out of capital to increase distributable income and effectively a distribution out of capital. This amounts to a return or withdrawal of your original investment or from any capital gains attributable to that, and may result in an immediate decrease of NAV per share.
• It is possible that a part or entire value of your investment could be lost. You should not base your investment decision solely on this document. Please read the offering document including risk factors for details.
A monthly review and outlook of the Asian Quality Bond market.
Market review - as at January 2024
As the pace picked up in January, markets initially saw some retracements in the global bond rally during the end of 2023 as expectations of an earlier rate cut from the Fed faded due to still resilient economic data. However, as quarterly earnings from banks revealed a daunting possibility that many Commercial Real Estate (CRE) loans could fail to repay principals, US Treasury rates dipped again to sub 4% levels, ending the month at 3.91%. Spreads in the Asian credit market, however, remained tight, reflecting the strong supply demand technicals that had been anticipated for the start of the year. JACI Asian Investment Grade (IG) credit spreads widened slightly by 2 basis points (bps), resulting in -0.12% in total returns for the month.
It was largely a firm month for Asian Investment Grade corporates. Thai banks reported improving net margins for the 4th quarter of 2023. China’s annual Central Economic Work Conference emphasized “stability” as the keyword for 2024, with the market expecting regulators to continue its support in seeing China through its trough of economic and property sector weakness. News of China’s three asset management companies (AMCs) - Cinda, Orient, and Great Wall being incorporated into China Investment Corporation prompted a 10-20bps tightening across the AMCs curves. In the technology space, Baidu and Lenovo saw equity prices slumping on accusation of connections with China’s military and/or electronic espionage, but bond prices remained well supported on the back of healthy sector technicals and attractive all-in yields. On the flipside, negative news was observed in some areas of investment grade credit - China’s big four asset management companies (AMCs) experienced downgrades by Fitch and Moody’s, a decision that was made in view of the weakened governmental support that these institutions had amid their substantial property exposures. Huarong, in particular, was downgraded to high yield by Moody’s.
Investment grade sovereign bonds held up well in January. S&P upgraded Indonesia’s 3 largest state-owned banks, Mandiri, Rakyat and Negara to BBB from BBB-, mainly due to higher likelihood of extraordinary government support. Meanwhile, quasi-sovereigns also witnessed further spread tightening, with several Indonesian quasi-sovereigns gearing up to implement renewable energy projects in line with Indonesia’s ambitious green energy transition plans.
The primary market for Asian US Dollar corporate bonds began the year with a decent start, with more than half of new investment grade issuances coming from South Korea. Sovereign issuances, however, came in weaker, resulting in a combined fall in YoY total issuance numbers. By quantum, ESG bonds comprised approximately one-fifth of investment grade USD new issuances.
Fund positioning
The Fund increased its duration positioning relative to benchmark as the rally in US Treasuries continued into December. Some T-bills were deployed into Chinese credits with good upside potential and long dated local currency bonds.
Performance review
On a net-of-fees basis, the First Sentier Asian Quality Bond Fund returned -0.58% in January, underperforming its benchmark by -0.46%.
The Fund’s overweight in duration was detracted from performance as bond yield edged higher over the month. An underweight in sovereign bonds from Indonesia and the Philippines added to performance, while overweight in quasi-sovereign credits detracted from performance. Exposure in local currency bonds and the Japanese yen detracted from performance as the US Dollar strengthened against most currencies.
Q1 2024 investment outlook
2023 has not been for the faint-hearted. The euphoric mood from China’s post-Covid reopening that highlighted the start of 2023 revealed its alter ego as the year progressed with a slew of turbulent events, such as the regional banking crisis and Israel Hamas war. Adding to that, Asian Credit was dealt a challenging hand — the persistent increase in US rates, a struggling Chinese property sector as well as China’s economic slowdown. Thankfully, the resilience of the Asian Credit market came through, with the index as a whole still chalking almost 5% in total returns year-to-date.
Entering 2024, we expect global growth, in aggregate, to be slower than in 2023. Our earlier views that US economic conditions were bleaker than hard data suggested was arguably early, but as Covid-era savings run dry, jobless claims rise and retail sales weaken, we are beginning to see the sobering reality of an economy under strain due to the prolonged high interest rate, high inflation environment. We now expect the Federal Reserve (Fed) to adopt a wait-and-see approach over the next few months before deciding on their next move. Barring a reacceleration of inflation in 2024, we believe the Fed has reached the end of the current rate hike cycle.
In Europe, sustained high prices continue to depress economic growth. Even as headline inflation trends lower, stronger European countries such as Germany are grappling with faltering growth as manufacturing and services activity continue to contract. Unless inflation cools off significantly enough to meet the European Central Bank (ECB’s) 2% target, we expect the ECB risks not cutting rates soon enough to cushion the effects of the slowdown in growth in the EU. We believe that growth in Europe in 2024 would be subdued, at best.
China’s policies have been turning highly accommodative even though they stop short of a massive stimulus like the one in 2008-2009. By allowing budget deficit to widen to above 3%, it is a very strong indication of China’s commitment to prop up growth. However, despite the political commitment to stabilise growth in China, the multilayered problems causing China’s slowdown means that we don’t expect a quick recovery. The property sector and weak consumer sentiment will remain weak links that need to be addressed. In other words, we still need actual gross domestic product (GDP) numbers and pre-sales in the property sector to pick up on a sustained basis before market confidence can be restored. Nevertheless, we are of the belief that the Chinese economy will emerge much stronger from this consolidation process and maintain a positive longterm outlook for the economy.
Asian economies have been resilient thus far, but effects from China’s slowdown are not negligible. The growth outlook in Asia is showing signs of weakness especially for exports oriented countries including Singapore, South Korea and Taiwan, caused not only by China’s slowdown, but also reflective of the lackluster demand from developed economies. We believe that this trend is likely to stay. Within the Asian region, countries with a stronger domestic story, such as India and Indonesia, are likely to fare better. Against this weakening external backdrop, most Asian central banks have paused rate hikes as inflation moderated and shifted attention to supporting growth. We remain constructive on the region’s longer-term growth prospects as Asian economies continue to move up the value chain in the global economy.
Thus far, the rising inflation in Japan has been insufficient to convince Japanese regulators to normalise monetary policy. However, the Bank of Japan’s next move should be closely watched as any signs of change to their Yield Curve Control policy will have significant implications for the course the dollar’s strength. We see higher certainty of the Euro and other Asian currencies continuing its appreciation against the US dollar, a trend that is largely driven by the Fed’s move. Asian local currency bonds may perform well should the Fed cut interest rates in 2024, as this will likely lead to further dollar weakness versus Asian currencies, further boosting Asian local bond returns.
We remain constructive in Asian IG credit. Fundamentals are now mixed but technicals will likely remain a tailwind during the early part of 2024. Even as credit spreads are almost at postGFC tights, high all-in yields well above 5% does makes this asset class attractive from an income carry perspective. Our bias is to focus on higher quality names that have the liquidity and resilience to withstand a hard global landing, should such a scenario emerge.
Source : Company data, First Sentier Investors, as of end of January 2024
Read our latest insights
Important Information
Investment involves risks, past performance is not a guide to future performance. Refer to the offering documents of the respective funds for details, including risk factors. The information contained within this material has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy or completeness of the information. To the extent permitted by law, neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this. It does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. The information in this material may not be edited and/or reproduced in whole or in part without the prior consent of FSI.
This material is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong. First Sentier Investors, FSSA Investment Managers, Stewart Investors, Realindex Investments and Igneo Infrastructure Partners are the business names of First Sentier Investors (Hong Kong) Limited.
First Sentier Investors (Hong Kong) Limited is part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.
To the extent permitted by law, MUFG and its subsidiaries are not responsible for any statement or information contained in this material. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this material or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
Get the right experience for you
Your location : Hong Kong
Australia & NZ
- Australia
- New Zealand
Asia
- Hong Kong (English)
- Hong Kong (Chinese)
- Singapore
- Japan