LO Funds
Asia Value Bond

At the time of writing, the Fund recorded a gain of +2.05% (as of 20th Feb; USD N Accum share class) on a YTD basis, vs the benchmark JP Morgan Asia Credit Index (USD). The Fund closed 2024 strongly at +12.22%, which comes on the back of a reasonably good 2023 at +8.46%.

During January, we shared our outlook for 2025 in a webinar. A summary of that including a link to the webinar can be found herein: https://am.lombardodier.com/ch/en/insights/2025/february/asia-fixed-income-a-promising-outlook-for-2025.html

On a high-level, we opined that Asia IG has once again become attractive after the recent repricing of US Treasury yields wider. In January, UST 10Y yields reached a high of 4.75% from a low of 3.7% in September 2024. This has pushed Asia IG yields to 6% or higher. We shared our view that we believe the Fed which is currently on pause after the latest 100 bps rate cuts (Fed Funds Rate been cut from 5.375% to 4.375% from Sep to Dec 2024), will once again resume its rate cutting cycle in 2H2025 into 2026 – and we expect at least 2-3 rate cuts by end 2026. In line with this view, we increased the duration of the Fund from 5.1 years at the start of January to 5.5 years now (we had previously reduced the duration from 5.6 to 5.1 years in 4Q 2024, and this action is increasing the duration back at higher yield levels).

With regards to HY, our outlook is sanguine with Asia-EM having (I) entered a ‘clean’ and new credit cycle since 2023, (II) easy domestic market funding conditions in each of the various Asian countries, (III) greater demand for USD high yielding instruments by Asian investors, (IV) increase in liquidity within Asia, and (V) no significant supply of new USD HY bonds in the Asia-EM universe. The increase in liquidity is coming from lower money market rates (100 bps lower given the recent Fed cuts) as well as significantly liquidity from onshore China markets which is finding its way in international Asian markets via the China-HK Mutual Recognition Fund scheme. This has provided an initial tranche of investment totalling USD 300b, from mainland China to HK, and this capital is rushing to buy both income and growth opportunities in the Asia as well as the international markets. Overall, we are bullish on the regional HY segment for the third year in a row.

Lastly, we are very constructive and excited about China’s continued economic transition from a heavily focused infrastructure/real-estate economy to a high-value advanced tech focused one. A year ago, we opined that 2024 would mark the stabilisation of China’s economy. We now think China has reached quite a high level of technological self-sufficiency, and that the government has become comfortable with the transition. We expect China’s export led growth to continue in a healthy manner despite all the media noise around US imposing tariffs (China achieved a record trade surplus of over USD 1trn in 2024), and we believe that the government will support to increase domestic demand and consumer confidence. The drag of negative wealth effect from real estate will diminish over the course of this year, and as such China is entering a new 10-year resurgence of stable growth and economic success. If we juxtapose this upon the Chinese equity markets, this resurgence started in Jan 2023 so we are likely in the 2nd calendar year of market growth. As such, we have continued to increase our Chinese holdings and opportunities in the Fund, skewed towards BBB and HY.

As part of our efforts to increase duration via IG segments since the start of the year, we added to new Japan’s Daichi Life Insurance 6.2% (10-year call; A- rated bond) at 1% fund weight and Thai Oil 2048s at 6.6% yield. In the 5-year space, we added to Africa Finance Corporation supranational new 7.5% hybrid and Standard Chartered 7.625% AT1s (both of which are callable in 5 years). Since then, Standard Chartered Bank announced stellar 4Q results of pretax income at USD 1.05b, with low cost of impairments at 19 bps in 2024, low exposure to HK commercial real estate, and recording a strong CET1 ratio of 14.2%. We expect the bank to do share buy-backs to reduce the CET1 ratio to 13.6%. With continued increase in credit quality and earnings resilience, we think our Standard Chartered subordinate bonds will continue to grind tighter and provide high single digit returns this year.

To make space for some of the duration extension and new IG purchases, we sold a significant amount of our solid low-duration IG holdings. This included selling all of Australia’s QBE Insurance AT1s and 2026-callable T2s, Thailand’s Muang Thai Life callable 2026, Krakatau Posco 2027 and Sands Macau 2028. We also trimmed our holdings in First Abu Dhabi Bank 2035 (10 non-call 5-years) after a significant rally of spreads from 180 bps to 130 bps.

Within new opportunities, we added to Nanyang Bank 2034 (callable in 2029) at 150 bps which we think is cheap. We also bought for the first time ever, Prosus bonds which is the parent of South African company Naspers. Prosus essentially is an investment holding company and its single biggest investment is in China’s Tencent. As such, the Country of Risk for Prosus is China. In what is arguably the most legendary investment of this century. Prosus (or Naspers) paid USD 32m back in 2001 for a 46.5% stake in Tencent which is technically worth USD 284b, i.e. multiplied by 8875 times! Nevertheless, Prosus has been selling Tencent shares in recent years and utilising that capital generated to buy back its own stock, so as to close its own holding company discount. Prosus currently owns 25% of Tencent, has a net asset value of over USD 150b, and is net cash. We bought an initial holding in the Prosus 2032 at a yield of 6.4% or 170 bps in spread which we believe is cheap.

Lastly, we re-entered and took a small position in Alibaba convertible bonds (0.3% fund weight) in January based on our positive view on earnings. We had previously sold our position in Oct and repurchased it lower in Jan this year. The bonds are up by almost 30% now.

Within HY, we added to (I) GLP Singapore Jun-2026, (II) new Vedanta 2033 (the fund’s highest conviction and largest issuer position at over 6%), (III) China tourism, pharma and insurance conglomerate Fosun 2028, (IV) Japan’s Rakuten USD perpetuals. We also bought China Vanke bonds after the strong direct support shown by the Shenzhen government and policy direction by Beijing. Within EM, we added to new issuance of Egypt Sovereign 2030 and 2033 whilst selling our holdings in the 2029 bonds at lower yields. Lastly, we received new Sri Lanka Sovereign bonds post the successful restructuring and continue to believe in the upside potential given its yield (on a total return basis) is over 10%. To fund many of these purchases and increases, we sold all our holdings in Japan Softbank at tight yields, which is embarking on a new investment phase that will increase its credit leverage. We also reduced various tight yielding India BBs including renewable entities JSW Hydro 2031s and India’s Renew Power bonds.

Lastly, it is worth mentioning that the Fund was impacted by the weaker price action of HK’s New World Development bonds in January. However, this was well absorbed by the portfolio. We believe the firm has sufficient solvency and its early refinancing of syndicated bank loans for 2025-2027 period will ultimately be good for the credit profile of the firm.

On a global view, we are growing increasingly uncomfortable with the recent events in the US. I personally believe we are witnessing an unprecedented decay in US institutional strength, which will be detrimental to US foreign policy and domestic conditions for years if not decades to come. President Trump’s approach to foreign policy, in our perspective, will alienate much of the developing world and Global South owing to its constant threats, weaponisation of various US laws and instruments, and tariff impositions. US will likely cease to be seen as a credible long-term partner by much of the international community, which will likely incrementally lean towards China. The Trump’s administration of having unfriendly measures (tariffs) and tone against even its best of allies such as Canada and Europe, will have long-term consequences for US trade and growth in our opinion. Additionally, the DOGE plans to “reduce the size of the government and its bureaucracy” but it is essentially in a very short span of time, (I) culling thousands of government jobs, (II) disbanding significant amounts of grants to various support programs, (III) shutting down various research divisions of agencies such as one of the Department of Education, (IV) reducing support to minorities and those in lower social stratas, amongst other things. It is utilising brute force to get access to government data and has compromised the judiciary system. Judges who prohibit DOGE from accessing data, are being impeached or threatened to be impeached. This is comprising the ability of Judges to independently judge, and thus significantly reducing the institutional strength of US.

In what is the most eye-raising and disturbing piece of news to me personally, tech billionaire Elon Musk used his influence against a Judge (John McConnell) following his decision to unfreeze federal grants. Elon then took action against Judge McConnell’s decision by making his daughter a target – by posting on X shared screenshots of the daughter’s picture, bio, and financial disclosures. This action of doxxing has set a precedent, whereby government officials including those from the US Treasury Department and the Fed, could be intimidated as their families could be targeted if they were not aligned to the desires of Elon and the DOGE group. This essay provides more background and perspective: https://sevastianwintersps.substack.com/p/elon-musks-new-low-targeting-a-federal?utm_campaign=post&utm_medium=web

For this very reason, we now think there is a probability that US institutional independence can be easily compromised, including that of the US Treasury department and the Federal Reserve. Will the Treasury Department be independent in planning its issuance of Treasury debt including the ratio of notes by maturity? Will the Fed be independent in its monetary policy in deciding the size of its own balance sheet (via QE or QT) and its interest rate policy? Will Jerome Powell feel intimidated that his family profiles could be shared on the X platform and potentially be subjected to ‘internet hate’, if he doesn’t accede to lowering interest rates? Nobody knows this, but the path of least resistance here seems to be chaos, fear and decay of institutional strength and credibility built up over decades. For this reason, we believe there is a growing and strong case that US Treasury long-end yields can decline well below the Fed’s current rate of 4.375%, and the US yield curve can once again be inverted.

If some of this plays out over the coming months, we do believe our portfolio will be well positioned in a safety of the ‘Asia region’, and the higher IG duration element will drive gains in the Fund. A sudden weakness of the US economy caused by higher unemployment owing to the DOGE plan and slashing of government jobs, will lead to lower interest rates in Asia and in particular in HK which will be beneficial to the economy and various real-estate focused credits there. We do think the idea of US exceptionalism has been taken too far, and too much capital has been parked in the US; and some of that will rotate out to Asia and especially since China enters its new period of economic and social success.

We are more than happy to speak and discuss this potential interesting topic. Please feel free to reach out, and meanwhile we appreciate your support.

DHIRAJ BAJAJ

On behalf of LOIM Asia Fixed Income team