At GAM Investments’ latest Fixed Income Meeting, held on 29 June, Andrew Dewar, Investment Manager, shared his thoughts on the recent moves of Chinese high yield property markets and Adrian Owens, Investment Director, gave his reflationary outlook for the months to come.
Andrew Dewar – Asian Credit
It is the 100th year anniversary of the Chinese Communist Party this week, which has led to Asian credit markets being fairly subdued. However there has been some risk-off sentiment, particularly in China high yield property, due to the headlines relating to Evergrande Real Estate Group, China’s second-largest property developer. The company’s issues started at the end of May when it was revealed that regulators are investigating alleged third-party transactions with Shengjing Bank, which Evergrande has a 36% stake in and is their biggest shareholder. Following this, there has been a steady decline in bond prices, with speculation and rumours influencing the rest of the Chinese high yield property market – particularly the single Bs. Across the market overall, the only sector that was down over the month of June was real estate, and the only ratings that were down were single Bs and Cs in the JP Morgan Asia Credit Index. Thus, we have been reducing our property exposure, with the broad aim of slightly diversifying out of China real estate. However, we are not running for the exits just yet. We believe much of this movement is simply sentiment and with the market flows being relatively weak at the moment (with the celebrations going on) the negative news flow is causing a bigger downward movement than probably should be expected. Therefore, we are anticipating a reversal in the new quarter.
Adrian Owens – Global Macro and Currency Fixed Income
From our perspective, it appears the peak enthusiasm for the reflationary trade may have passed. Following the Federal Reserve’s slight shift in rhetoric we believe from here it is more a question of marginal positioning changes in a more range bound environment. We are still looking to implement some reflationary trades, but perhaps now these will be done more on any weakness. This is consistent with our general belief that relative value themes could be a good opportunity to generate returns over the next two to three months. In June, US inflation reached circa 5%, surprising everybody, but inflation on breakevens actually reduced a little over that period. Therefore we have continued to slightly reduce exposure relating to our reflationary view. In terms of currency, we have reduced long Russian rouble exposure, although we continue to think the story there is particularly good. We have also been a little more tactical on some of the relative value trades. Overall, although we are cautious, we are still very much in the reflation camp and hold the view inflation will remain stubbornly higher than central banks are currently articulating.
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