07/10/2019

Diamond Capital Management (Switzerland) Ltd.

Asia HY benefits from truce in US/China trade war and low interest rates

Asia HY benefited from the restart of negotiations on trade between the US and China at the G20 summit.
Further tariff increases on Chinese exports have been put on hold following the G20 meeting. The existing 25% tariffs on $250bn of Chinese exports remain active, while retaliatory tariffs from China will remain in place as well. Trump stated that China will “purchase large amounts of agricultural products”, however the size of the purchase was not defined, meanwhile, China has said they will only make purchases consistent with demand. With regards to Huawei, US companies are now allowed to sell equipment to Huawei “that will not impact US’ National Security”. However, there was no breakthrough on the key issues such as the enforcement of IP protection or the subsidies China provides to state-owned enterprises. We remain of the view that intense competition between the US and China on geopolitical, economic, and technological dominance will become the “new normal” due to the recent ascendency of China in all 3 areas.
With regards to the China property sector, YTD weighted average contract sales as of end May 2019 rose 15% y/y for the 30 major developers (based on CRIC data), while primary home prices are up +11.3% y/y in May (NBS data), showing that the residential property market remains robust (the trade war has had very limited impact on the sector).
We continue to expect a relatively drawn-out timetable for a resolution of the trade-war (there is still considerable uncertainty whether an agreement can be achieved), and as such, we remain positioned for any potential market volatility ahead by being biased towards higher quality credits and shorter duration. Having said that, we expect default rates to remain very manageable, as credit fundamentals are sound, and the slowdown in global growth is expected to be gradual. In addition, the halt of Fed rate hikes (and even potential easing) bodes well for Asian HY, as it means less depreciation pressure for EM currencies in general, and it also provides more room for Asian central banks to ease if that is needed to boost domestic growth.
The Angsana Bond Fund (USD Class AA) returned +0.75% in June bringing the YTD performance to +7.49 % (as of July, 1st).
The Fund Portfolio’s YTM is 7.74% and the duration is 1.53years.