Chinese real estate: systemic risk or specific opportunities for credit investors?
Alan Siow discusses recent volatility in China’s property sector and its implications for investors in the country’s credit market.
It was a volatile month given a combination of ongoing uncertainty around the war in Ukraine and expectations of tighter monetary policy. Hawkish rhetoric from the US Federal Reserve as it hiked rates led to a sell-off in US Treasuries, with a similar theme seen in other markets.
Egypt’s policymakers took steps to mitigate the impact of rising wheat prices and the central bank allowed the currency to move 10% higher, hiked rates and announced it intends to move onto a new IMF programme. Political noise continued in Tunisia but progress towards an IMF program continues.
Ongoing strength in commodity prices is having a divergent impact on economies across the region and differences in monetary policy direction reflect this, with India, Thailand and Indonesia seeking to support growth and Taiwan and Singapore looking to contain inflation. Omicron continues to spread, with China’s zero-tolerance response contrasting with South Korea, Singapore, Thailand and Malaysia.
Currencies in the region continued to outperform but the sell-off in global rates impacted some markets. Rate hiking continued but central banks in Chile and Brazil signalled that they are nearing the end of their hiking cycle. Argentina’s IMF deal passed in congress and was approved by the IMF board, resulting in the first disbursement of almost US$10 billion.
Central and Eastern Europe
Inflation continues to rise and central banks reacted with further rate hikes. The Polish government announced it will stop importing Russian oil and gas by the end of 2022 and will stop importing Russian coal by May at the latest.
Rest of Europe, Middle East and Africa (EMEA)
Economies with close ties to Russia saw their currencies weaken. The continued strength in oil prices remains supportive for oil-exporting economies in the Gulf region. This is likely to reduce the need for bond issuance this year.
EM corporate debt highlights
The market remained under pressure in March, exacerbated by the effect of Russian bonds leaving the index at a price of zero. Geopolitical developments were the main drivers of spread returns, with the spill-over effect from the Russia/Ukraine war weighing on broader risk appetite. That said, overall market moves were dominated by the underlying rates returns component. Continued liquidity pressure and renewed COVID lockdowns impacted the Chinese real estate sector; it will take time for the positive shift in policy support to be reflected in asset pricing.
Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.