PERSPECTIVES Asian Fixed Income - Asia Credit and Macro March 2019 Review - Approaching Equilibrium - AXA IM
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April 2019
Perspectives
Asian Fixed Income
PERSPECTIVES
Asian Fixed Income
out as the best performer in local currency, posting +5.22% in
Asia Credit and Macro March March, followed by Korea (+1.75%) and Indonesia (+1.71%).
2019 Review – Approaching Asian Credit Index Performance
Equilibrium
The J.P Morgan Asian Credit Index (JACI) posted +1.99% in
March, leading to its highest quarterly return since Q3 2010
at +4.89% YTD. The rally was driven by a 49bps tightening in Source: JP Morgan (Data as of 31st March 2019)
credit spreads over the last three months. The high Yield
segment powered the outperformance, with spreads Asian Local Bond Index Performance
tightening by 150bps, leading to a strong +7.78% return YTD. Index MTD 3-mo YTD 12-mo
As shown by the Corporate Emerging Markets Bond Index Markit iBoxx ALBI 1.04 3.10 3.10 1.60
Markit iBoxx ALBI (USD Hedged) 1.41 2.29 2.29 5.25
(CEMBI) performance at +5.2% YTD (its strongest quarterly Source: Markit iBoxx (Data as of 31st March 2019)
return since Q1 2012) and the Emerging Markets Bond Index
Global (EMBI Global) performance at +6.59% YTD, the rally
was global for emerging markets.
In terms of broad sectors, Sovereigns led the outperformance
in Asia, returning +6.21% YTD (+2.48% in March). Sri Lanka
emerged as the top performing country, posting +9.01% YTD
(+2.82% in March). Pakistan and Indonesia also contributed
significantly, posting +8.10% (+2.97% in March) and +7.42%
(+2.90% in March) in Q1, respectively. On the Corporates
side, performance was also strong at +4.90% YTD (+1.97% in
March). Real Estate was the best performing corporate
sector with +8.51% YTD return (+3.18% in March), followed
by Metals & Mining at +6.51% (+2.32% in March) and
Transport at +6.14% (+4.85% in March). On the Quasi-
sovereign side, returns were not subdued either at +4.31%
YTD (+1.81% in March).
In March, most Asian currency performed negatively or
slightly above 0% against the dollar at the exception of the
Indian rupee as expectation that Modi will stay in power is
gaining momentum. The Philippine Peso, South Korean Won
and Indonesian Rupiah formed the bottom-three performers
at -1.07%, -0.83% and -0.63%, respectively. Figure 1: AXA World Fund Asian Short Duration Cumulative
Performance from Inception to 03/31/19
Despite negative performance currency wise, local currency
returns were positive across all Asian countries due to the
recent spread tightening in the region. The Philippines came
1
April 2019
Perspectives
Asian Fixed Income
The Asian Short Duration Bonds Fund’s (or “ASD”) gross
return was +2.16% for March 2019. The fund benefited from
our continued rotation from investment grade credits to high
yield credits. We were also active in the primary market given
the attractive new issue premium against the secondary
market. Within our high yield positioning, we have rotated
out of Indo HY into China HY as the spread differential has
compressed significantly since the start of the year. We also
prefer to stay in the short duration bucket as the supply
pipeline picks up especially for high yields.
Fund Name Return (%) Volatility (%)
Asian Short Duration 21.21% 1.24%
AWF – Asian High Yield Bonds
Bonds Strategy
JP Morgan Asian Credit 18.28% 2.26% The Asian High Yield Bonds Fund’s (or “AHY”) gross return
Peer Asian Short 16.89% 1.48% was +3.05% for March 2019, outperforming JACI High Yield
Duration Fund by 32bps. The fund benefited from an overweight position in
Since strategy inception 10th March 2015 high yield China/ Indonesia property bonds as well as
Past performance is not a guide to future performance. All data commodity-related issuers. During the month, we have
denominated in USD. Peer fund performance is calculated on a dividend
reinvested basis, adjusted upwards by adding back management fees.
increased our exposure to short-dated B-rated China HY
property developers for the yield pick-up and took profit on
certain Indon HY credits to reduce our overweight position.
Figure 2: AXA World Fund Asian High Yield Cumulative
Performance from Inception to 03/31/19 AWF – China Short Duration Bonds
The China Short Duration Bond Fund’s (or “CSD”) gross return
was +0.74% as the fund continued to benefit from its
exposure to hard currency Chinese credits as credit spreads
tightened further. Meanwhile, returns from onshore bonds
were more modest with onshore rate movements being
slightly negative to returns.
AWF – Emerging Market Short Duration Bonds Asian
Carve-out
Fund Name Return (%) Volatility (%) The Emerging Market Short Duration (EMSD) Asian carve-out
Asian High Yield Bonds 15.72% 1.96% delivered +2.48% of gross returns in March as the hard
Strategy currency bond market rallied for the third consecutive
JP Morgan Asian Credit 12.05% 2.00% month. Exposures in Indonesian corporates and Chinese
non IG property continued to deliver strong returns, while Sri Lankan
Since strategy inception 28th November 2016 sovereign holdings were among the best March performers.
Past performance is not a guide to future performance. All data
denominated in USD. Peer fund performance is calculated on a dividend
AWF – Global Emerging Markets Bonds Asian Carve-out
reinvested basis, adjusted upwards by adding back management fees.
For March, the carve-out generated a return of +3.03%
Source: AXA IM, JP Morgan, Bloomberg as of 31st March 2019 versus +2.31% for EMBI Global Diversified Asia, exhibiting an
excess return of +0.72%. Overweight exposures in China,
Indonesia and India were key contributors to return. Despite
being underweight Malaysia relative to the index, Malaysia
corporate credit holdings generated more returns than the
benchmark Malaysian exposure.
Asian Fixed Income Performance Drivers Fixed Income Market Outlook
AXA World Fund – Asian Short Duration Bonds
2April 2019
Perspectives
Asian Fixed Income
From Global… … to Asia
Bond markets took their cue from central banks in March It appears the Asian credit markets may finally be achieving
with both the US Federal Reserve and the European Central some sort of equilibrium. A record pace of bond issuance in
Bank sending out dovish messages that suggest that the the first quarter of 2019 is beginning to have an impact on
upside risk to interest rates in 2019 is limited. This in turn bond spreads as issuers are now having to pay more to get
reflects evidence that global growth has slowed significantly deals done, secondary curves are repricing wider, and some
compared to the period of above trend growth registered at new issues are underperforming. Through mid-April, JACI
the beginning of 2018. The challenge for investors now is to Non IG is in positive territory, but this is the effect of carry.
what extent the growth slowdown persists and intensifies After spreads (z-spread) compressed 148 basis points in the
and whether that reduces support for the corporate sector first quarter and helped drive total returns of 7.78% for the
over the balance of the year. Credit markets have benefitted benchmark, the Asian high yield market is catching its
from the changed interest rate outlook but should recession collective breath. This looks to be the status quo for a while
risks increase then the trend of tighter spreads would likely as the positive impact of China’s economy stabilizing and
be reversed again. market supporting election results confirmed in Indonesia
with Jokowi’s win and expected in India (Modi currently
Early indications on the health of the manufacturing sector in leading in polls) will be offset by a continued active bond
April have been provided by purchasing manager surveys. On pipeline. Risks to this view include a hawkish turn in Fed
the positive side, there was a strong bounce in the Chinese comments or a setback in Trade War negotiations, a
index while the Euro Area index continued to edge lower due comprehensive deal now largely expected by the market.
to weaker readings in Germany and France. The UK saw a These are near term risks that would dampen investor
bounce in its manufacturing sector’s index but this has been sentiment and halt, or even reverse, the very strong
interpreted as being due to an inventory build ahead of Brexit momentum the market has generated through the first
with companies fearing some disruption to supply chains quarter of the year. Longer term, the markets may be
from a possible “no-deal” scenario. In the US, the ISM index confronted by the withdrawal of policy support and the
for March rose to 55.3 which suggests some stabilisation in resumption of structural reforms in China, particularly
the manufacturing sector. While Europe may lag, the deleveraging. The Chinese government has been vocal and
stimulus measures put in place by the Chinese authorities in active in its support of economic growth, but there is a clear
recent months appear to be having some impact. trade off by delaying deleveraging critical to relieving difficult
to contain systemic risks. We continue to see potential
Consensus growth forecasts for the balance of this year and benefits to owning high yielding local currencies as the Indian
2020 together with the disappointing performance of rupee (69.48) and Indonesian rupiah (14,038) have stabilized
inflation indicators will encourage bond investors to continue to levels that are still much weaker to the US dollar than their
to hold duration. For interest rate expectations to rise there 2017-2018 peaks (INR 63.37 and IDR 13156), despite the
would need to be strong evidence of US growth rising back cumulative impact of supportive policy actions as well as
significantly above the 2.5% level and Euro Area growth back significantly improved investor sentiment.
above 2.0%, with associated upward revisions to inflation
forecasts. At the moment this does not look feasible unless
much talked about fiscal stimulus becomes a more realistic
driver of economic growth in the quarters to come. Central
banks are unlikely to row back on their recent dovishness.
Instead, better data may encourage the strong continued
performance of credit markets in the second quarter of the
year.
Figure 3: Asian IG credit spreads tightened by 7 Bps while US
IG credit spreads tightened by 2 Bps – now 17 bps cheaper.
3April 2019
Perspectives
Asian Fixed Income
250.0 Figure 4: Asian HY credit spreads tightened by 83 Bps while
US HY credit spreads widened by 15 Bps – now 109 bps
200.0 cheaper.
1000
150.0
142
800
126
100.0
600
524
50.0
400 415
0.0
Asia - US Spread Asia IG US IG
200
-50.0
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
0
Asia - US Spread Asia HY US HY
st
Source: Merrill Lynch (Data as of 31 March 2019)
-200
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Source: Merrill Lynch (Data as of 31st March 2019)
4April 2019
Perspectives
Asian Fixed Income
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5April 2019
Perspectives
Asian Fixed Income
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6April 2019
Perspectives
Asian Fixed Income
rentabilidad futura de inversiones financieras y, en ningún caso, está dirigido a clientes minoristas y/o inversores finales. La
información contenida en el mismo está destinada a clientes profesionales y contrapartes elegibles tal y como son definidos en
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sobre Mercados de Instrumentos Financieros) 2004/39/CE, presumiéndose, por tanto, la experiencia, conocimientos y
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financieros pueden cambiar significativamente y ser diferentes a los análisis e indicaciones que figuran en este documento.
Los inversores deben tener en cuenta que el mercado financiero es fluctuante y que está sujeto a variaciones y que los tipos
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Los subfondos de AXA WORLD FUNDS, SICAV de derecho luxemburgués armonizada domiciliada en 49 Avenue J.F. Kennedy
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