“We have been reducing high beta sectors, such as property developers, and adding in more stable sectors like telecoms,” he said. “The idea is to maintain some level of yield while having some price stability.
“In terms of strategy, short duration is working well at the minute, given both the spreads and volatility in longer-duration bonds and also the interest rate uncertainty coming from the Federal Reserve.”
Another propulsive component is the prospect of further Chinese easing – though while Veneau is constructive on its potential impact, he is wary of how it will be effected and the possible ramifications on investor sentiment.
“We are expecting further Chinese easing due to remaining policy flexibility, both in terms of FX reserves and an ability to cut rates,” he explained.
“The impact should generally be positive, but how it is implemented is very important. We saw in August that the market anticipated it as a panic move to support exports, and how the Chinese government communicates the moves to support the economy will be almost as important as the moves themselves.
“A downside technical risk is that broader EM redemptions could cause bonds to reprice sharply lower if it spreads into the Asian market. IG spreads are roughly around 240 basis points, which is well below the 2011 wide zone and somewhere in the middle of the post-financial crisis band. There is downside potential if there is any kind of re-pricing due to redemptions.”
