Emerging market debt – Roundtable
economy, but there are concerns over transparency and human rights. What are your views on China’s bond market, Jean? Jean de Kock: The technicals are strong. Most of that is about index inclusion, with onshore rates bonds issued by the govern- ment and select quasi-sovereigns, such as the three policy banks, being included by all major benchmarks providers. That creates a strong technical for the rates bonds. The issue then is what role that would play in portfolios. If you look at China rates versus other sovereigns, if you are just looking for carry, you get a decent pick up, but a lot of that gets explained away by credit and FX risks. So, it becomes less attractive if you are doing it on a hedged basis.
There is a case that China is under-repre- sented in those indices compared to other emerging countries. Some asset manag- ers may be allocating to China bonds ahead of index inclusion or may have an off-benchmark allocation.
Anthis: The huge dislocation, especially in hard currency, was too attractive to ignore. We loaded-up our exposure to hard currency through short duration strategies. The local currency space was not particu- larly crowded at the time, so the disloca- tion was not as great. We were overweight hard currency and started picking up names that were trading at levels that made no sense to us. We took into consideration the ‘double whammy’ with oil trading negatively. A lot of oil exporters took a double hit, one from the pandemic and another from the oil price. We tried to identify the names that were most dislocated. We identified those idiosyncratic names and started buying as much as we could because it is free money once normalisa- tion is restored. We have been trying to take advantage of these dislocations since March 2020.
China has the world’s second largest
The other aspect is that if you are looking beyond the rates opportunity set to pri- vate-owned entities or local government financing vehicles, it is largely an ineffi- cient market and international investors are not getting paid enough to take the spread risk. We have seen a big shift since last year in defaults with the state allowing state- owned entities to default. That has seen a big repricing, which is probably positive for the onshore markets, so we will see increased interest from foreign investors. Murphy: China’s investment characteristics are attractive, particularly in the local mar- ket, and you have a currency that tends to march to its own drum, so it can be a diver- sifier. You get attractive nominal rates and a fairly deep market so institutional inves- tors can move a lot of capital there. My concern is that Bond Connect delivers everyone’s bonds into a single omnibus account that could be wiped out and you lose your bonds. We trade China in the interdealer market onshore where we get to face Chinese counterparties.
China will continue to grow as an alloca- tion, but it is one country out of 110 that we choose to invest in. We have been long rates and long currency but took that positioning off at the start of this year, which has been appropriate.
How are investors accessing China? de Kock: It depends how you look at the emerging market opportunity set. If you look at it on a GDP or share of global growth basis, China is an outlier versus a lot of other emerging market countries. It is alongside the developed markets in terms of size. From that perspective, we have clients interested in accessing China through a standalone allocation. It might use onshore rates as a base and selectively add credit risk in the offshore US dollar mar- ket as well as CNY bonds, which will probably rise as we see that credit differ- entiation increase in the onshore market. The benefit of that flexible approach is dif- ferent alpha drivers. You still get diversifi- cation and are not necessarily taking a singular currency view; you can play CNY versus the US dollar as an additional lever and hedge that depending on your preferences. Sometimes China is directional, it is policy led in terms of what drives the bond markets as well as the currency mar- kets. There may be some cases for a stan- dalone allocation, but in a broader fixed income portfolio it has diversification benefits, so it depends how you want to look at it in your portfolio.
How do you find undiscovered value in emerging markets? Murphy: We recognise that informational advantages exist, but they are on a spec- trum. We are one of a thousand analysts covering China, so my opinion is one of many. We use such a large universe because there are not many people paying attention to Myanmar, for example. Our job is to understand what is happen- ing at the individual country level as a
Issue 104 | June 2021 | portfolio institutional | 41
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52
