Aberdeen Asset Management’s exposure to both China’s onshore and offshore bond market has been reduced, the firm said.
Valuations and liquidity issues were the reason for trimming offshore bonds, said Akintewe during a press briefing on Wednesday.
There has also been more issuance from companies that the firm is not comfortable owning or holding.
“Combined with the risk of currency depreciation, it means we have to find more attractive opportunities in Chinese bonds.”
In the onshore market, although bonds have performed well the firm sees better valuations elsewhere in the region. “[Onshore bonds] are not one of our bigger overweights in our portfolios,” he said.
Aberdeen has access to both the offshore and onshore market via the qualified foreign institutional investor (QFII) and renminbi foreign qualified institutional investor (RQFII) programmes, according to Akintewe. The firm will eventually be trading in China’s interbank bond market, he added.
EM volatility
The firm remains cautious on emerging markets fixed income in general. Akintewe cited concerns over key risk events in the US and in Europe.
“There is the Italian referendum and the result of that could result into another bout of very significant volatility [in emerging markets].”
In addition, the UK’s Supreme Court decision on Brexit and the highly anticipated Federal Open Market Committee meeting in the US, are both happening next month, he added.
The unexpected win of Donald Trump has caused a rise in US bond yields, which has cooled the rally in emerging market bonds in 2016.
“As we start to get clarity on actual policies from the US, the likelihood is you’ll start to see the market stabilise and begin to possibly adjust in instances where these risks have been overpriced,” he said.
According to Akintewe, the company has been taking less risk in its portfolios due to the US presidential election. Exposure to high-yield credit and to Asian credits in general has been reduced.
From a country perspective, exposure to Indonesia has been reduced because it has a high level of foreign investor positioning, making it vulnerable to macro shocks, he said. However, Indonesia and Malaysia are two markets that the firm aims to allocate capital back into, since both markets have shown an improvement in valuations, he said.
He added that portfolio cash balances have been increased as the firm waits for buying opportunties.
Domestic-driven markets
The Indian bond market, which is driven mainly by domestic factors, gets an overweight, he said. However, it is difficult to acquire government bond quotas. In India, foreign investors account for only around 5% of the market, which is significantly lower than Malaysia (40%) and Indonesia (35%).
In addition, yields in Indian bonds have fallen by around 30-40 basis points post-US elections, compared to some of the other emerging market bond yields, which rose by 50-100 bps.
The firm is also promoting a frontier emerging bond strategy, Akintewe said. Like India, frontier markets tend to be much more impacted by domestic policies and have comparatively low exposure to foreign investors and low volatility.
Frontier markets are also one of the few asset classes that have been able to deliver positive returns for each of the last four years, he added.
