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Chinese local Fixed Income remains current as a refuge

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The Chinese bond market, the second largest in the world and 1.5 times the total size of emerging market bonds, has some favorable factors such as: relatively higher yields against G7 bonds as well as a currency that has behaved poorly. defensively, helping Chinese government bonds to outperform.

From is included in the FTSE Russell World Government Bond Index in October 2021; Foreign investors sold Chinese government bonds worth a net of 35 billion yuan ($5.5 billion) in February. The magnitude of the withdrawal rumors that part of the sales could come from Russia, since it is estimated that it has about 140,000 million dollars in Chinese bonds and 13% of Russian reserves are in yuan, which could have served as a oxygen balloon after the sanctions imposed by the West.

However, it should be remembered that in risk-off episodes the performance of Chinese bonds has been clearly superior. The following graph shows the cumulative returns of the different asset classes during episodes such as the great financial crisis of 2008, the European debt crisis of 2011-2012, the Taper Tantrum of 2014, the sale of risk assets of 2018, by Covid-19 and the settlement of the year 2022:

And more recently, while Chinese bonds posted losses of 0.4% since February 24the indicator of 19 comparable emerging market bonds that make up the Bloomberg Local Currency Government Bond Index has fallen 2.9% in the same periodthereby reinforcing the local bond resistance despite the swings in the market in general, with which many of those who withdrew money in February are reconsidering getting back in.

The index S&P China Government Bond Index (designed to track the performance of government bonds denominated in local currency in China), reached a profitability so far this year is 0.67%being internship plan in March, a month in which most assets recorded considerable declines. But even looking at it in the long term, the performance has been bullish:

Go investors seek safer assets After a drop in local stocks, such as Chinese onshore bonds in RMB, which could become one of the best-performing assets in the world in 2022, according to managers at Eurizon Asset Management.

However, at this point in March, Chinese debt could be drawing buyers’ attention again dad the strong and growing divergence of the country with the rest of the world in terms of monetary policy. While China is expected to continue with its monetary easing policy and average Bloomber’s expectations of a further cut of 50 bps to 10.5% of the reserve requirement ratio in the first of next year, the US Federal Reserve The US has raised rates by 25 bp this week and with an expectation that the reference rate for the end of 2022 will be around 1.9%.

There are those who remained bullish on Chinese bonds and others more cautious, such as Goldman Sachsthat last monday lowered its view from optimistic to neutral in the short term because of the risk that they may be pressured to sell if funds run short of cash amid emerging market outflows, citing “it’s a risk-averse situation and it wouldn’t be surprising to see overseas investors downsizing and overweighting the liquidity” according to Stephen Chiu, director of Asia FX.

between go Optimistic is Citigroup’s strategyDirk Willer, who in a report last week said which remained overweight China bonds amid growth suspicions. As well Edwin Gutierrez, head of emerging markets sovereign debt at Abran, said Chinese bonds should be “anchored” given growth prospects. and the PBOC’s continued predilection for further easing. “We expect Chinese government bonds to outperform global bonds,” he said. Wilfred Weepassed away in Singapore from Ninety One Singapore Ltd, furthermore what he repeatedly Bruno PatainCountry Head Iberia of Eurizon has remarked “the behavior of yuan bonds in relation to global bonds is surprising, reinforcing their capacity for diversification in investors’ portfolios, serving as a refuge in bad times, but also as assets of great profitability in the good ones”.

Yuan bonds have been the best performing bond market since 2004, averaging around 7.0% annually. Its Sharpe ratio (five-year data) also compares well with other assets.

Despite the yuan’s weakness to over 6.37 per dollar on Friday ahead of a scheduled meeting between US President Joe Biden and Chinese President Xi Jinping, where the two leaders are expected to discuss issues including Russia’s war on Ukraine and competition between the two countries, the yuan is well supported by a strong balance of payments position.

Which funds are best suited to invest in yuan bonds?

Eurizon Fund-Bond Aggregate RMB: One of the few Morningstar 5-star funds, ranked in the top 3 for performance out of 76 funds in the 1-year Citywire category and 2nd in 3-year and also 3-month out of 84 funds of the category. The volume of activity exceeds 3,400 million euros, managed by Stephen Jen and Mónica Wang (with an A rating from Citywire). With a very competitive combination of profitability and risk, both in the short and long term.

Despite the prevailing volatility in the markets in general, and despite last week where there was a recovery in the return of risk assets, the fund has remained in positive territory, reaching a return so far this year of + 4.11% (according to the latest Morningstar data), having closed February with a return of over +3.5%. The fund is practically fully invested, as it will have a liquidity position of less than 3% at the end of 2021.

Another background is china Aprd Onshore Bond Fund, with assets that exceed 2,141 million yuan and that despite not being a 5-star by Morningstar, so far this year it is one of the big winners (along with Eurizon) in terms of profitability, since it reaches almost 3% according to the latest Morningstar data as of March 18, while in February it closed with +2.33%. The fund is managed by Adam McCabe and is positioned at the top of the Citywire ranking. However, take a little more risk compared to the previous fund (3.5 standard deviation).

It is also an actively managed fund, with a strong weight of government bonds (52.3%) followed by quasi-sovereigns (37.5%) and 8.5% of corporates, with a very low liquidity position.

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