06 August 2018, 14:54 GMT
Value to be found in Asian bonds
Chinese policymakers have reaffirmed their focus on economic stability with a raft of targeted measures to ease credit conditions away from the property market. This was a significant development given the worrying slowdown in broad credit expansion, which continues to run at the slowest rate since mid-2015.
A confidence-boosting statement from the recent Politburo economic conference, China’s most important mid-year economic meeting, followed hot on the heels of these measures. While much can be read between the lines, our key takeaway was that President Xi Jinping currently prioritizes financial stability over debt deleveraging.
These developments are positive for Asian bonds, which have already begun to rally, especially high yield debt. High yield credit spreads remain a long way off their recent tightest levels and nearly 200 basis points wider than US high yield credit spreads - a level not seen since the devaluation of the renminbi in 2015. Against these attractive valuations, easier credit conditions in China should help issuers continue strengthening their balance sheets.
Source: Fidelity International, Bloomberg, August 2018
China government bonds also offer value and could enter something of a sweet spot if the renminbi begins to stabilize. An average yield of around 3.5 per cent offers a decent income return with some scope for capital gain with slowing domestic growth, contained inflation and more accommodative monetary policy.
However, it’s likely too early to call an end to the depreciation of the renminbi and other Asian currencies, except the Japanese Yen. Developments in the US-China trade war are likely to continue creating uncertainty in the outlook for the renminbi, despite policymakers’ recent effort to make it harder to short the currency.
The US Federal Reserve left policy rates unchanged last week, but the Federal Open Market Committee upgraded its wording related to economic strength in the accompanying statement. A rate hike in September now appears like a done deal, helping to anchor the short end of the US yield curve and support the US dollar.
Japanese financials get a break
The outlook for the yen is more nuanced following the Bank of Japan’s forward guidance and inflation forecast downgrade last week. The central bank faces an impossible task trying to alleviate pressure on the domestic financial system from years of negative interest rates, while maintaining downward pressure on the Yen. It seems they’ve leaned more towards the former in this latest move, which is positive for bank and insurance stocks.
Japanese bond yields fell after the central bank doubled the trading range for the 10-year JGB to 20 basis points, but this is likely a temporary move. There is enough underlying strength in the Japanese economy to suggest the upper limit to the range will be tested at some point and this will be positive for financial institutions earnings while increasing the chance of yen appreciation.
Also, while the decision to reduce the amount of current account balances to which a negative interest rate is applied is likely to only have a small impact, the decision to change the composition of ETF purchases is more meaningful for financial stocks, particularly banks. The purchases will now be skewed heavily to the TOPIX and away from the Nikkei indices, where the financial sector represents a higher share of total market value. Banks have a 7 per cent weight in the TOPIX versus 1 per cent and 6 per cent for the Nikkei 225 and Nikkei 400 respectively.
Source: Fidelity International, Bloomberg, August 2018
Japanese financials continued their rally after the announcement, but offer plenty of scope for further return. Valuations look very attractive on forward price earnings ratio and price -to-book value.
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results. These materials are provided for information purposes only and are intended only for the person or entity to which it is sent. These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product.
Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as of the date indicated and are subject to change without notice.
This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German institutional clients issued by FIL Investments International – Niederlassung Frankfurt.
In Hong Kong, this content is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road, Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C. Customer Service Number: 0800-00-9911#2.
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.