Diamond Capital Management (Switzerland) Ltd.

The Compelling Story for Asia HY Continues


The Corona Crisis, as in previous crises, has once again proven that global markets are correlated. Therefore, despite the supportive data from Asia we think that in this period of high volatility and concerns, there is a preference for investing in Asian HY in a more prudent way and thus enjoy both better yields (particularly relative to yields seen in European and US credit) and lower volatility.

Asia High Yield has become an increasingly important asset class, next to US and EU High Yield. The most compelling reasons are better credit metrics, lower default rates and higher spreads compared to the US and Europe. Asia B rated corporate bonds compared to US B rated corporate bonds offer a ca. 300bps higher yield and a shorter duration by ca. 0.7 years. In a recessionary environment is it furthermore important to invest in countries with healthy balance sheets and enough firepower to further support their economies with fiscal and monetary stimulus, which in our opinion is the case in Asia, especially China. With regards to handling the Covid-19 situation one can say that Asian countries, with the exceptions of the Philippines, Indonesia and India, have managed extremely well to contain the virus and put their economies back to work.
China is the largest country and largest trading partner in Asia as well as the second largest economy in the world. It is growing faster than the US or Europe and will be one of the only countries growing this year, expected to be between 1.5-2%. For next year, China expects GDP to grow over 7.5%. The strong push from the government to move China from a manufacturing driven (made in China) to a consumer driven economy (consumed in China) is making investments in domestically driven sectors a long-term compelling trend. During their latest plenary session, China reiterated their “Made in China 2025” plan, where China aims to achieve self-sufficiency in the most important industries, especially in high-tech. In fact, in April 2020, China has overtaken the US in number of patents granted, news that has somewhat gone under in the midst of the Corona crisis. 
The world is heavily underweight to Chinese equities and bonds compared to its world GDP contribution. However, the benchmark weights of China in major indexes are rising, which will result in substantial capital inflows into China and the region.
Angsana Bond Fund – Our Positioning
We are managing the fund from an absolute return perspective with the first goal being capital preservation. Beginning of 2020, we already expected a global economic slowdown; hence, we were cautiously positioned in Asia HY having a short duration and being invested in the higher quality names of the Asian HY corporate universe. This was the reason for our outperformance during the March 2020 sell-off, where we lost ca. -7%, vs. the Asian HY market that lost ca. -20% (as well as our positive performance in 2018). As we expect volatility to continue, we want to stay cautiously invested and deploy our cash only in high quality names, who have a sound balance sheet and business models that can withstand a recession over the next 1-2 years. Most of our positions are not dependent on exports, but on internal demand from China/Asia.
China Property Market  
As we have a substantial exposure to China Real Estate, we would like to reiterate, that it is a systemically important sector for the Chinese government as it is strongly interlinked with the financial system and household leverage. China properties contribute ca. 30% to the GDP, which compares to ca. 20% from exports and 4% from exports to the US. We believe the fundamentals are healthy, housing sales are up 10% y-o-y from 2019, even after a weak Feb/Mar 2020. The majority of residential property buyers are either first time home owners or upgraders, in addition, it’s difficult to speculate on property as first time buyers need a 30% cash down payment, while second time buyers need to put down a 40-60% cash down payment. Furthermore, the Chinese government has many tools, such as influence over mortgage availability and mortgage rates, price caps, and home purchase restrictions, to either curb or support the residential real estate market.
Overall, we believe the property market will continue to be among one of the more defensive sectors in China HY now, as the market is still driven by continuous urbanization and increase in household incomes.
Our Asian/Chinese RE book has a low beta and we invest very selectively into high quality large cap residential developers in Tier 1, 2, 3 cities with excellent land bank, high cash flow, high profitability, good credit metrics. While the recovery rate in case of default for Asian HY bonds is ca. 40% (similar to the US), the recovery rate for Chinese RE developers is 70-80%, a result of the strong collateral backing for residential properties.