The China fixed income opportunity

As the world’s second largest bond market, China fixed income offers compelling opportunities as a powerful diversifier and source of yield for global investors. In this brief video, Wilfred Wee, Portfolio Manager, talks about the evolution of the asset class and the allure for today’s investors.

23 Jul 2021

9 minutes

Wilfred Wee

Key points

  • The fixed income landscape: Low or even negative yields are a challenge for today’s bond investors, especially in a reflationary global economy. China fixed income offers the highest yields of all major bond markets.
  • Why the China bond market is compelling: China is the world’s second largest economy and home to the second largest bond market. It is the world’s largest net creditor nation; this is a high quality bond market.
  • Increasingly accessible and important asset class: access routes for foreign investors have increased and become more straightforward in recent years, with global bond index inclusion an endorsement of the China fixed income asset class. It is liquid and accessible to global investors.
  • How China bonds have behaved historically: As a result of the significant differences between China and the rest of the world – e.g. in terms of economic structure and governance – China fixed income has proven itself to be a powerful portfolio diversifier. The asset class has helped offset losses during some major equity market sell-offs.
  • Putting currency concerns in context: Behind the various news headlines around trade wars etc. the volatility of the renminbi has been remarkably low relative to other major currencies. Having some exposure can be helpful to investors’ portfolios.
  • The political landscape: Investors should look beyond the noise around, e.g., China/US rivalry, and focus on what is important from a potential investment return perspective: China is business- and investor-friendly and its bonds can be a compelling addition to global investors’ portfolios.
  • The active vs passive debate: Passive investment options typically invest in central Chinese government debt and bonds issued by the country’s three main policy banks. Active investors can dynamically explore a much broader opportunity set, spanning onshore as well as offshore bonds that are mostly internationally rated.

Specific risks

Geographic / Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that the resulting value may decrease whilst portfolios more broadly invested might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses leading to large changes in value and potentially large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Government securities exposure: The Fund may invest more than 35% of its assets in securities issued or guaranteed by a permitted sovereign entity, as defined in the definitions section of the Fund’s prospectus. Emerging market (inc. China): 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. Income Allocation: On some investments (e.g. the Implied Yield from Forward Foreign Exchange derivative contracts) any gains may be allocated to income rather than the capital account. This may cause greater fluctuations in the capital value of the fund. Income may be taxable.

General risks

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.

Authored by

Wilfred Wee
Co-Portfolio Manager, All China Bond

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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