Since the beginning of 2022, global markets have been marked by heightened market volatility due to the military tensions between Ukraine and Russia and expectations of a faster pace in US policy normalization on inflation overshoots. The Fed’s March dot plot, which shows the median policy rate projection, indicated a more aggressive rate hike path for 2022 before reaching a peak rate of 2.5-2.7% in late 2023¹.

A sharp rate hike could put pressure on US growth. We believe the Fed will likely maintain a hawkish tone with the key goal of curbing inflation. The 10-year United States Treasury (“UST”) quickly approached over 2.9%².

In China, the National People’s Congress meeting in March set a GDP growth target of around 5.5% for 2022 (8.1% for 2021)³, with front-loaded infrastructure spending, higher tax cuts, and monetary and property easing. More monetary easing, which may include policy rate cuts or RRR cuts, should occur to ensure abundant liquidity and support credit growth. We think more aggressive policy easing is still much needed as COVID outbreaks pose renewed downside risks to growth.

With a major correction seen in Asian high yield bonds during the past few quarters, we should not be too far off from the bottom of the credit and property cycle in China. The supportive tone from regulators and government officials in mid-March on curbing risks for the property sector are encouraging signs that will stabilize the sector outlook. We look for further signs of improvement in China’s physical property market, which is likely to emerge in the second half as the first half will be negatively affected by lockdowns. More fine-tuning measures, such as the relaxation of mortgages and home purchase restrictions in selective cities, shall continue to forge ahead. We emphasize credit quality in bond selection, as credit polarization is likely to stay.

The higher UST yield had been a drag on bond performance for Asia investment grade (IG) bonds YTD. Shorter duration is preferred, and tight credit spreads provide less cushion to offset the rates risks. Credit spreads for Asia IG bonds should remain resilient on low fallen angel risks. Specifically, China high yield spreads have already priced in the property cycle and sector consolidation. We stick with credit names with access to funding and manageable near-term maturities as we remain cautious about idiosyncratic risks.

Source:
1. Fed, 31 March 2022
2. Bloomberg, 28 April 2022
3. NPC, 2022 Fiscal Budget Report, March 2022

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This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited. Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.

This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited.