The Fund recorded a gain of +3.21% (as of end Feb; USD N Accum share class) on a YTD basis, vs the benchmark JP Morgan Asia Credit Index (USD) which returned +2.20% for the same period. The Fund closed 2024 strongly at +12.22%, which comes on the back of a reasonably good 2023 at +8.46%.
In our last newsletter, we expressed our strong concerns surrounding the approach undertaken by the newly appointed Trump administration. Specifically, it was around the DOGE campaign and negative impact on labour markets if DOGE efforts went through. This would be a function of direct firings as well as reduction in government grants/loans to parts of government and society that need it most, reduction in consumer sentiment and other second order effects. Another serious concern of ours were the efforts to weaken institutional strength of the US, such as actions by Elon Musk to force the judiciary to judge in his favour.
Over the past few weeks, adding to our concerns is the fact that Trump’s administration is now weaponising tariffs and utilising it as the main tool for its economic and global trade agenda. What has worried us, is that the use of tariffs has expanded from merely seeking to rebalance trade, but to (a) increasing government revenue, (b) arm twisting corporates to invest in the US industry, manufacturing and relocate its supply chain there, and (c) intertwining US global security provision with the requirement to trade with the US.
Assuming Trump’s administration proceeds with the 25% tariffs to Mexico and Canada, either maintains or further increases the recently applied 20% tariffs to China, and further adds various restrictions to European and global trade, we believe US corporates will pauses some amount of capex and hiring plans in order to preserve cash and understand economic outcomes. Retaliatory tariffs would evidently slow global economic growth. Depending on how much of a slow-down the US faces, we would expect the Fed to cut by 2-3 times towards 3.5-3.8% and for the USD to weaken this year itself. There should be a flight to safety to EUR and JPY in FX, and Gold within commodities. As we have argued for more than a year now, global clients have crowded too much capital in US markets (equities, credit, private markets) and this is set to reverse. Conversely, as this unravels and the froth comes off the US market, we could likely witness an uncorrelated increase in sentiment and asset price appreciation in the Chinese markets which is ongoing.
China has prepared its own policy response via its loose monetary and fiscal policy, where it plans to boost consumption domestically, and encourage its large corporates to lead in tech and proceed in global expansion. At the time of writing (17th Mar), the HK’s Hang Seng index is up 20% YTD while the S&P is down 4% YTD. Meanwhile, Hang Seng Tech index is up 32% YTD, and we continue to see a long runway ahead for leading China tech earnings and growth going forward. This should aid in broader asset growth and sentiment, including within the credit markets.
Specifically in IG, the US Corporate Investment Grade index has already witnessed widening from recent all-time tights of 75 bps (on a duration of 7 years) to 96 bps. This 20 bps widening is significant, but it comes from a very tight spread level. We believe that the rise in credit spread premia is fair, given the policy uncertainty emanating from the US. Similarly, global and Asia IG USD spreads have also been wider, providing us with a good opportunity for higher yields and spread rotation opportunities.
Over the month, we added to three core new issues namely HK’s Hysan Development, Japanese life insurance Meiji Yasuda Life and Indian toll-road owner and operator Varanasi Aurangabad.
Hysan issued an attractively priced 7.2% Baa3 ($750m) rated non-callable subordinated bond, with use of proceeds to call their existing 4.1% bond. Hysan is a high-quality owner and lessor of shopping malls and commercial properties in the popular Causeway Bay district of HK. It has a sufficiently low LTV, high quality income stream and hence a strong interest coverage which is expected to increase given their on-going expansion of their portfolio of assets. We believe the company will be able to delever despite already paying out healthy dividends, and expect the bond yields to drop by end of the year especially as the Fed cuts rates given this is a 5-year callable bond – which would be in the sweet spot of yield reduction as Fed cuts rates.
Meiji Yasuda Life Insurance out of Japan issued $2.1b of 10-year callable bonds (A3/A- rated by Moody’s/S&P) at an attractive 191 bps over UST10y, with a coupon of 6.1%. We see fair value for these bonds around 150 over UST10Y, and have added to this as a core holding within the fund. We already have existing exposure to Meiji Yasuda, and hence by this purchase have increased the weighting to 2.6% in the fund and hence making it the 10th largest fund position.
Lastly, the third new issue we added was Varanasi Aurangabad which is a toll-road entity in India, owned by a global entity of ROADIS which is an infrastructure company in turn owned by Canadian pension fund Public Sector Pension (PSP). The Indian entity owns a long-term highway concession consisting of a 192m highway between Varanasi and Aurangabad which was awarded to them in 2011. The highway is part of India’s Golden Quadrilateral, connecting major industrial and agricultural cities. The bonds have a final maturity of 2034, have security over the highway concession asset, and has a sinkable amortisation and mandatory cash sweep utilising the cashflows from the toll road. We have found this asset attractive with bond coupon of 5.9%, especially with its diversification offered vs other sectors amongst our fund holdings.
Within HY, we increased our weightage to India Infoline 2028 making it a 1.4% (Core position) within the fund. The firm is an established financial lender for 30-years across various financial products in India (mortgages, corporate finance, consumer finance) with stable management and strong institutional shareholder backing (ADIA and Fairfax are shareholders). The Reserve Bank of India has eased interest rates by 25 bps in 1Q25, and we see increasing room for the central bank to ease rates later this year and hence lifting growth and loan demand. The bonds currently yield over 8.5% for relatively short-dated 2028 paper, and we see this as an attractive low-volatility total return position.
At the time of writing (17th Mar), the Fund was positioned with a YTW of 7.5% (USD terms), duration of 5.5 years and average ratings of BBB-. India continues to be the core country allocation at 20%, followed by China 13.5% (increased from lows of 7-8% in 2023) and HK at 11%. The weaker market sentiment is allowing for new issues out of the primary market to be priced more attractively, and we are likely going to use the coming weeks to add to higher spread and yield opportunities in the fund.
Thank you for your continued support.
DHIRAJ BAJAJ
On behalf of LOIM Asia Fixed Income team
