Dear friends and investors,
Lower losses due to prior profit taking
The aggregated Acre fixed income portfolios across all clients are down -7.4% YTD as of end March vs the IBoxx Asia High Yield Index at -12.6%. The lower losses were mainly due to timely profit taking in early March while switching to China fixed income assets which were relatively shielded due to government support and early recovery from Covid. With an average portfolio coupon of 6+%, this means that even if prices were to not change from here, clients would be breakeven for the year.
Sharp drop in equity markets, fixed income was not spared either
The year so far has been a violent one with March with the S&P500 seeing its sharpest drop in history, at the worst point being down almost -35% from its peak in just 1 month. Fixed income was initially almost unaffected even as equities collapsed in late Feb but was invariably dragged down from 11th March onwards in a -15% fall in a matter of 2 weeks (Figure 1). While bond default concerns are valid, the additional impetus pushing prices down was a sudden rush for cash by investors due to margin calls, selling at any price regardless of fundamentals, causing a downward price spiral. That spiral was only halted by unprecedented intervention by global central banks in late March.
Figure 1: Fixed Income was more defensive initially, but got dragged down as investors rushed for liquidity
Market panic is an opportunity to buy
This dislocation created opportunities for Acre’s fixed income clients who picked up some oversold quality fixed income assets with yield to maturity/call of >9% for at least 4 years. These include Swiss bank Perps as well as BBB/BBB- China property names. Unfortunately, the speed of the recovery in April so far was as fast as the drop, and bond prices rallied faster than one can buy enough of.
Despite this, Asian bond yields are still attractive historically (Figure 2). But the market today is a bifurcated one: India/Indonesia bonds have not recovered as well as China, and for good reasons. Fixed income selection is now more important than ever before.
Figure 2: Despite top seen in yields, absolute yield levels are still attractive
Happy to discuss more over a call / video chat if you’re interested to know more.
Regards,
Vincent