AS the Covid-19 virus continues to spread globally and new cases rally in the US and Europe, global investors are reshaping their portfolio to make it through the pandemic. And a relative value attraction of Chinese bonds versus other markets has seen investors start to increase their holdings with a view to a more long-term position.
“The outbreak’s impact is undeniably visible – the longest economic recovery and bull run in history has ended, and the US and European economies will likely face recession,” says Timothy Tay, head APAC credit, UBS Global Wealth Management CIO.
Under this backdrop, the Chinese market, given that the Covid-19 breakout appears to be under control in the country, is gaining traction from global investors.
Due to the market volatility caused by the health crisis, investors now favour less-risky asset classes such as fixed income, and as a result, the Chinese bond market is on many global investors’ minds.
According to a senior executive from a global custodian bank, in the past few weeks, global investors have started to build up their position in the Chinese bond market through channels such as the CIBM Direct.
In Q1 2020, 26 new overseas institutional investors registered under the CIBM direct, resulting in a net inflow of 59.7 billion yuan (US$8.45 billion) in foreign holdings, according to data released by the People’s Bank of China on April 5. As of end-March, there were 822 overseas institutional investors registered under this scheme, holding a total of 2.26 trillion yuan.
J.P. Morgan Asset Management portfolio manager Jason Pang thinks Chinese bonds are expected to be one of the safe havens for global investors. “We’ve been overweight China local bond exposure since the outbreak of the virus,” says Pang, noting that the exposure is a long-standing preference.
Chinese onshore rates bonds, in particular, are more attractive given the relatively lowered value, according to Pang. “We like and continue to focus on policy bank bonds onshore and that is unlikely to change in the near-term,” he adds.
Pang also mentions that Chinese government bond yields are likely to benefit from some potential targeted easing by China policymakers.
“We see pockets of investment opportunity in Chinese real estate bonds, state-owned enterprises and Asia regional banks,” Pang notes.
Indeed, the Chinese property sector is experiencing a steady recovery from the Covid-19 outbreak. The top 100 property developers in China saw sales revenue surge 136.2% month-on-month to 769 billion yuan (US$108 billion) in March, according to Chinese real estate transaction service provider E-House.
According to UBS Global Wealth Management CIO, select one-year bonds in the Chinese real estate sector are safe to hold to maturity from a liquidity perspective because they should experience low price volatility due to their short duration.
With part of the lockdown in China’s epidemic centre of Wuhan removed today (April 8), the country is on the track of recovering from the health crisis. “Although domestic recovery is underway, we expect China's economy will remain under some economic pressure as growth in the rest of the world has had a sudden stop from the virus,” Pang comments.
“We have seen a substantial rally in developed markets as the virus has spread worldwide. Taking into account the slowing rate of new infections in China, Chinese bond yields have declined substantially less relative to other markets. This creates a backdrop in which there is a relative value attraction of Chinese bonds versus other markets. We think markets will acknowledge this over time, particularly given our rates outlook for onshore China,” Pang explains.