Mistakes made, lessons learned

Andy Seaman, Stratton Street Capital’s London-based partner and chief investment officer

Seaman’s big investment mistake came way back in 1993, but it has relevance for the investment environment today. Back then, the market had strong expectations that the US Federal Reserve was going to raise interest rates – tighten monetary policy.

However, 1993 was the time of a major bull market in bonds and interest rates had hit a record low of 3%.

“We were still running relatively long positions and we thought we could get out before the Fed tightens and it wouldn’t be much risk to our portfolio. That turned out to be completely wrong.”

Then in February 1994, the Fed surprised the market by raising rates 25 basis points. Bonds sold off and yields rose. The schedule accelerated with rate hikes in March, April, May and August. By November, interest rates had nearly doubled to 5.5% from 3% in January, resulting in a disastrous bear market for bonds.

“We got caught out by that,” Seaman said.

It was a time when he took too much risk even though he knew that the Fed was going to raise rates.

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Hong Kong’s strong wealth offsets slow population growth, says Stratton Street

Hong Kong is one of the wealthiest places in the world, providing attractive fundamentals similar to those in Switzerland, Qatar and other Middle Eastern countries for bond investments over the long term, according to London-based fixed income specialist, Stratton Street.

The city was also one of the world’s largest net creditors, benefitting from the fact that it had amassed substantial assets abroad, and implying that it could draw down on its overseas investments, Andy Seaman, partner and chief investment officer at Stratton Street said.

It is ranked second place in net foreign assets as a proportion of GDP out of 43 countries, according to Stratton Street, which screened countries based on their ability to repay debt. China is ranked 13th place.

“If you have amassed a lot of wealth over the years, then you can continue to expand production through investments,” Seaman said.

“That’s not the case if you are an indebted country that needs to offset a population that is shrinking.”

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Resilient Chinese economy appeals to foreign investors

Foreign investors are becoming more optimistic about the increasingly open Chinese market after acknowledging the stability and resilience of the country’s economy.

It is expected that in one or two years, China will attract more global investments.

The Bank of England said in a latest report that driven by domestic and global demand, China’s economy secured 6.9 percent growth in the first half of this year, which was higher than expected.

Based on the fourth-quarter growth of last year, the bank believes that China’s economy has shrugged off risks in the past two years and begun to stabilize.

Denmark’s Danske Bank noted that China’s domestic demand for real estate has managed to maintain strong growth under tightened policies, according to a latest report that included in-depth analyses on the tenacity of Chinese economy.

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Stratton Street: Question bond index weightings

“Bond indices are constructed to give the biggest weight to the most heavily indebted countries and companies, as well as countries where populations are shrinking dramatically,” Seaman told FSA.

To determine heavily indebted countries, Seaman uses data on net foreign assets (NFA) --  the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigners (chart below).

NFA is expressed in terms of percent. A negative NFA percentage measures the extent of a country's indebtedness and he limits portfolio exposure to countries with an NFA that is better than minus 50%.

Examples of countries with a negative NFA, as measured by the firm, are Portugal, Greece and Spain. In addition, the working population in these economies is expected to drop 30% by 2050.

On the flipside, there are countries that are wealthier and have rapidly growing populations above the world average. Examples of such countries are in the Middle East, such as Saudi Arabia, Qatar and the United Arab Emirates, Seaman said.

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Blackrock: Foreign inflows in Chinese bonds ‘gradual’

In March, Citi announced that it will include China in its emerging market and regional government bond indices, as reported. Its three indices, the Emerging Markets Global Bond Index, the Asian Government Bond Index and the Asia Pacific Government Bond, will include Chinese government bonds starting in February next year. 

Besides Citi, Bloomberg Barclays also launched two new indices to include Chinese sovereigns: the Global Aggregate + China Index and the Emerging Market Local Currency Government + China Index.

“The inclusion automatically puts [China bonds] on a global index, where the passive money that tracks it has to go in,” said Seth, speaking at a media briefing in Hong Kong. 

He believes it will take 12-18 months for a majority of fund managers to adjust their allocations to China bonds and be reflected in the percentage of foreign inflows. 

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Trading bonds in China? You might want this chat app for millennials

SHANGHAI (Reuters) - A new scheme that connects China's local bonds with Hong Kong promises to open the country's $9 trillion (7 trillion pounds) debt market to global investment - but investors venturing into the mainland are coming to terms with the massive community that does business not on trading platforms, but social chat apps.

The "Bond Connect" programme launched this month allows international investors to buy and sell in China’s historically restricted interbank bond market through a Hong Kong trading gateway, and has been hailed as a milestone in the opening up of the country’s capital markets.

On the mainland, however, much of the turnover in the bond market is generated from informal chat groups on QQ, a mainstream Chinese mobile chat app, where individual investors look to buy, sell, borrow and lend.

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Bond connect seen to help foreign investors access China debt market

The newly-launched China-Hong Kong Bond Connect is expected to facilitate the internationalisation of China’s fixed income market with more foreign institutional investors using it to access Chinese debt, according to asset managers.

The bond connect, which went live on July 3, allows foreign investors to invest in China’s onshore market via Hong Kong in the so-called northbound trading.

Charles Li, chief executive of the Hong Kong Stock Exchange (HKEX), says in a statement that “the bond connect will give Hong Kong a bigger role in fixed income, expand our mutual market programme from stocks into a second asset class and give us a good foundation for further development in fixed income and currency.”

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China’s Bond Connect launches

China launched its long-awaited Bond Connect programme on Monday, offering international investors access to its $10 trillion debt market via Hong Kong.

During the initial trial phase, only northbound flows from Hong Kong into China will be allowed. No date has yet been set for southbound flows. The programme will replicate two previous ‘Stock Connect’ initiatives, linking Hong Kong with bourses in Shenzhen and Shanghai. Hong Kong’s legal system is trusted by international investors, and the Special Administrative Region has no capital controls, unlike the mainland.

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Global investors optimistic about China’s growth

As China continues deleveraging the financial system, many international institutional investors believe that the process and stable economic indexes will fend off a free fall.

The Bank of England says that the Chinese economy saw better-than-expected growth in the first quarter, laying a solid foundation for the nation to reach its 6.5-percent target.

According to a report from the European Central Bank in May, emerging markets, especially China, were showing positive changes since the second half of 2016.

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`Bond Connect' approval opens China's market further

Following the Stock Connect scheme, Bond Connect aims to become the most convenient channel for foreign institutional investors to enter the Chinese fixed income market, industry sources said.

The cross-border bond trading programme was formally approved by the People’s Bank of China (PBoC) and Hong Kong Monetary Authority (HKMA) yesterday, according to a joint-statement. In the first stage, only Hong Kong and overseas institutional investors are allowed to trade bonds without quota restrictions in the China Interbank Bond Market (CIBM). The over-the-counter market accounts for 95% of total bond trading volume in China.

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Stratton Street teams up with Universal-Investment to launch global credit funds

Stratton Street Capital has teamed up with Universal-Investment to launch two global credit Ucits sub-funds, with Stratton Street acting as asset manager and Universal-Investment Luxembourg SA acting as the management company.

The Stratton Street Ucits – NFA Global Bond Fund UI  and the Stratton Street Ucits – Next Generation Global Bond Fund are both focused on exposure to developed and emerging market bond indices. The funds are targeting higher income than typical investment grade indices.

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China opening up its bond markets, but currency seen as major barrier

China's policymakers plan to open the doors wider than ever to foreign investment in the country's $3 trillion bond market, in part to help shore up the struggling yuan. But the currency is also proving to be a major barrier to the success of their plan.

Foreigners own less than 2 percent of China's $3.3 trillion in outstanding bonds and say getting their cash out of China and recent weakness of the closely controlled currency are obstacles to investment.

Foreign investors are also skeptical they can assess risk accurately when most of the $2.1 trillion in corporate bonds are rated investment grade by domestic rating agencies.

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Emerging Asia risks growing old before becoming rich

Asian populations will grow old at a faster pace than any other region in the coming decades, giving rise to concerns that emerging economies such as China and Thailand could see growth stall before they transition into high-income status, economists said.

Such a development, if it materializes, will strain public finances and limit governments' ability to put in place the necessary systems, such as pensions, to cater to the growing number of seniors, experts told CNBC.

Standard Chartered economists wrote in a note that Asia's rapid aging will hit the growth of China, Hong Kong, South Korea and Thailand by 2020, and Singapore by 2025. That would be before China's projected transition into a high-income economy in 2026 and Thailand's "well after 2040."

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For Chinese companies, if you can't move money overseas, raise it overseas

Chinese companies struggling to get their money out of the country have come up with an alternative: raise money overseas. Chinese firms have issued some $52.6 billion worth of U.S. dollar bonds in the first quarter, up 72% from the previous three months, according to Dealogic, and nearly five times the amount from the first quarter of 2016.

The surge has come as Beijing has tightened curbs on capital outflows, making it harder for Chinese companies to use their yuan earned domestically overseas. Those companies looking to make acquisitions abroad, or even just pay back existing dollar debt, are increasingly turning to the U.S. dollar markets to raise funds.

“If a company is considering an overseas acquisition and looking for financing, even if it is sitting on billions of [yuan] onshore, it may struggle to transfer [that money] offshore to pay for it,” said David Yim, head of debt capital markets for Greater China at Standard Chartered in Hong Kong.

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Why investors can't ignore China bonds?

“China is the third biggest bond market in the world, and it is underrepresented in the global bond indices. But that’s going to change soon,” Seaman told FSA.

In March, Citi announced that it would include China in its emerging market and regional government bond indices, as reported. Its three indices, the Emerging Markets Global Bond Index, the Asian Government Bond Index and the Asia Pacific Government Bond, will include Chinese government bonds starting in February next year. 

Besides Citi, Bloomberg Barclays also launched two new indices to include Chinese sovereigns: the Global Aggregate + China Index and the Emerging Market Local Currency Government + China Index. 

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Biggest Problem for Dim Sum Managers Is Finding Bonds to Buy

  • Debt issuance set to shrink even as maturities climb to record

  • Fubon Asset cuts offshore yuan bond holdings, looks to dollar

Dim Sum bond fund managers, armed with $2.6 billion and little to spend it on, are struggling with a market creaking under the challenges of record maturities and slumping sales.

Ben Hsueh, who oversees an offshore yuan fund at Fubon Asset Management in Taipei, says he has few investment choices at the moment. His high-yield bond fund has reduced holdings of Dim Sum notes to less than 10 percent from 50 percent in 2013, with the remainder made up of a small portion of onshore debt and 90 percent of dollar credit that it hedges back into the yuan.

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Die-Hard Yuan Bull Slams Bears Banking on Dollar Revival

  • Seaman at Stratton Street betting Trump pivot to bolster yuan

  • China’s currency still up in 2017 despite dollar’s resurgence

Andy Seaman has a message for yuan bears: Get over it.

China’s currency is on an upward trajectory and those not positioning for gains will lose out, says the London-based manager of Stratton Street Capital’s Renminbi Bond Fund. Investors fixated on the yuan’s three-year pullback are “obsessed with the past” and will see their performance lag as dollar weakness and resurgent growth in China bolster the yuan.

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Source: https://www.bloomberg.com/news/articles/2017-03-02/die-hard-yuan-bull-slams-retro-bears-banking-on-dollar-s-revival



Stratton Street makes IG push with double launch

Stratton Street has launched two new investment grade bond funds as part of plans to expand its Ucits-compliant fund range, Citywire Selector has learned.

The Stratton Street Next Generation Bond fund was launched on 16 December and forms the basis of the firm’s global investment grade capabilities.

The fund will hold predominately investment grade paper with a minimum of 80% invested in this quality of bonds. This is while having the ability to take up to 20% high-yield exposure should market conditions warrant.

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Bloomberg: Saudi Arabia Is Looking for Friends

Saudi Arabia is set fair to bring its first foreign bond sale for a minimum of $10 billion. But, let's face it, $20 billion has a nice ring to it if they can get to that, especially as it would beat Argentina's $16.5 billion in April.

Indicative yields have been posted in the region of 2.60 percent for 5 years (160 basis points over similar maturity U.S. Treasuries), 3.60 percent for 10 years (plus 185 basis points) and 4.85 percent for 30 years (plus 235 basis points, a total steal that will tempt many hedge funds to go long).