LO Funds
Asia Investment Grade Bond

MARKET COMMENTARY

Risk markets started 2025 off strongly, with the S&P 500 and STOXX 600 both reaching all-time highs in January. However, three notable wobbles dominated the agenda: First, there was a sizeable bond sell-off early in the month, with hawkish data pushing the 10yr Treasury yield up to 4.79% before unwinding thanks to softer inflation prints. Second, there was a separate risk-off move because of DeepSeek’s new AI model, which led to big questions about the sustainability of US tech valuations. Simultaneously, it led to a resurgence of Chinese tech stocks as the perceived gulf between the technology divide between the two nations shrunk dramatically. Finally, tariffs were back on the agenda, with markets losing ground at the end of the month as the new Trump administration said they’d be imposing tariffs on Canada, Mexico and China.

Our view on core rates is for the 10y UST to have a slow, gradual glide path lower. The bar for rate hikes is very high (and would be needed if we are to breach 5% on UST), and we expect 2-3 cuts over the course of 2025 and 2026. The last-mile inflation could take longer to move towards 2% with tariff/geopolitical headlines and strong services momentum, and the Fed has responded in an appropriately hawkish manner to counter this in our opinion.

We have turned incrementally positive on China following DeepSeek developments and we see a change in sentiment towards the region. Select Chinese stocks such as Alibaba and BYD have risen nearly 50% just in the past month, reflecting the acknowledgement of the technological innovation and potential from the country. The Chinese government has also begun to take forceful action around supporting Vanke – a mixed-ownership property developer where Shenzhen Metro owns a 27% stake. This is crucial to stabilising sentiment domestically. We are incrementally positive on China’s trajectory moving forward.

Elsewhere, India presented a positive budget that was geared towards spurring consumption. Growth in India was showing signs of a mid-cycle slowdown over the past quarter, and we would expect a resumption following the significant tax relief measures for the middle class population. At the same time, the finance ministry has continued to maintain its fiscal discipline, with a 4.4% central deficit targeted in FY26. These measures should support the sovereign rating at Investment Grade into 2025 as well.

All in all, we believe the region has strong macroeconomic anchors coming together, and alongside attractive valuation levels, should support strong performance for Asia Investment Grade Credit in 2025.

PORTFOLIO COMMENTARY

The LO Asia IG fund returned +16bps in January, marginally underperforming the JACI benchmark by 36bps owing to idiosyncratic factors. However, by mid-Feb 2025 (14th February), this underperformance has reversed into a +29bps outperformance. At the time of writing, the portfolio has a yield-to-worst of 6.0% (USD terms), Z-spread of 196 bps, and duration of 6.2 years.

We have actively traded the portfolio in January. On balance, we trimmed tight names such as short-end SK Hynix, Tower Bersama, and QBE Insurance. We also did switches out of AIA 2034s and QBE Insurance, into the new Dai-Ichi Life Insurance’s hybrid perpetual bonds that priced at 6.2% yield. Dai-Ichi Life is one of the largest life insurers in Japan and has the potential to outperform in 2025 in our view. We also added to Africa Finance’s Baa3 rated new hybrid perpetual bonds at 7.5%. Africa Finance is a supranational which is 80% owned by the Nigerian government and banks, and focuses on infrastructure financing in Africa. They have strong profitability, asset quality and growth metrics, and benefit from a preferred creditor status (they get priority in payments even in events of distress). We introduced a small position as a diversifier in the portfolio as a result.

For the rest of 2025, we would advise investors to look through the rates volatility and invest in a portfolio with high carry and moderate duration that has the potential to provide compounded high single digit returns over the next 3-5 years.

Thank you for your continued support.

NIVEDITA SUNIL

On behalf of the LOIM Asia Fixed Income team