A brake on the managed portfolio?
WITH the recent collapse of the Chinese real estate sector, investors who have exposure to this sector could be impacted. In this article, we seek to share the impact on our managed portfolios, along with some feedback from the fund house.
The high yield Asian segment has faced immense volatility over the past two years. The Covid-19 pandemic plagued the global securities market in 2020, while the fall in 2021 was due to the non-repayment of bonds from property developer Evergrande, which has become an industry-wide concern.
Subsequently, volatility also impacted the performance of the fixed income segment of our managed portfolios. Thus, we seek to discuss the impact of the high yield Asian segment and our action plan for the future.
China currently has one of the highest dollar-denominated debt in the world, accounting for nearly 40% of the Asian high-yield bond index in US dollars. Over the past decades, the country’s economy has grown rapidly, fueling the domestic real estate sector as more and more Chinese middle classes see owning property as a key stage in their careers.
Such demand for properties has led real estate developers to look to global markets for financing needs, resulting in the Asian High Yield Bond Index being mostly occupied by Chinese developers.
So any volatility within the Chinese real estate sector that we are currently facing would also impact the broader index. The recent challenges faced by China Evergrande have spilled over to the Chinese real estate sector.
Yields in the Asian high yield segment increased significantly to reach 2020 levels of almost 12%, while the overall Asian high yield bond funds on our platform also fell by at least 15% of the year. peak in the hollow.
With house prices skyrocketing over the past decade amid relentless demand for properties, the Chinese government is looking to cool house prices to make them more affordable for its people.
In addition, the growing leverage on the balance sheets of various companies is also a concern as the sector is seen as consistently important to the Chinese economy, highly interconnected with upstream and downstream industries.
In this context of rising prices and weakening of the balance sheet, China imposed three red lines in August 2020 to access the financial situation of developers. The number of broken lines would thus determine the amount of debt that these companies can increase each year.
The managed portfolio was little affected by the uncertainties in the sector
Within our managed portfolios, our Conservative to Balanced portfolios are exposed to the Asian high yield segment through Eastspring Investment Asian High Yield Bond MY Fund with an allocation of nine, seven and five percent respectively.
Among our managed portfolio, the conservative portfolio has the highest allocation to the Asian high yield segment due to its higher allocation to fixed income relative to other risk profiles.
With nine percent exposure, this translated into a loss of minus 1.34 percent and minus 0.52 percent year-to-date and since inception respectively for the conservative portfolio.
This demonstrates that the impact on managed portfolios is reasonably low due to our diversified and value-oriented investment approach despite the volatility of the sector in recent quarters.
Eastspring Investment’s perspective on the Chinese real estate sector
Recently, during our communication with the fund company, they shared their thoughts on the sector and the position of their portfolio within their investment universe.
With a clearer policy on Chinese properties, they expect the industry to see a positive turnaround as they don’t believe the Chinese government will allow the industry to collapse.
According to JP Morgan, current prices imply a higher probability of default than analysts’ consensus estimates. This indicates that the market may be too pessimistic, suggesting that further declines should be limited from current levels.
In order to filter out stronger companies, the fund manager also looks at off-balance sheet items or pre-sales in addition to the three red lines measure. Current holdings that are at risk are Evergrande, Fantasia, Kaisa, all of which have exposure of less than two percent of the total portfolio value.
Apart from the companies mentioned, the fund does not invest in companies in the “red zone”. Going forward, the fund manager will pay more attention to companies that are sold indiscriminately.
Overall, we share the same point of view as the fund company. While it is likely that we have not seen the end of the regulator’s intervention, we see that companies will emerge from this event with a stronger balance sheet.
This bodes well for the industry and should ultimately be more sustainable in the longer term. Deleveraging would also reduce credit risk, which should stabilize future price movements in the fixed income market.
Additionally, we believe the sector has a decent risk-reward profile, as the very attractive valuations of Covid 2020 levels outweigh the risk involved.
Overall, the Evergrande saga has sparked widespread concern among global investors, pushing the Asian High Yield Index to historically lower levels. Investors who are exposed to this sector could see declines in their respective portfolios.
While managed portfolios did not avoid this bloodshed, our diversified approach to investing resulted in minor losses on this front.
Our stance vis-à-vis the Asian high yield segment remains strong as we believe it has attractive risk / reward profiles.