The continued growth and attractive yields of Chinese debt are two driving forces pushing Schroders’ head of Asian fixed income to take ‘meaningful’ positions in the emerging market.
Speaking to Citywire Selector from Singapore, Rajeev De Mello, who is a named manager on seven Asia and EM bond funds at the group, said July’s Bond Connect initiative should propel international interest in the market.
‘Chinese government bond yields are high and are among the highest in the market at present, with these sitting above many other emerging and Asian countries at present. Government debt-to-GDP is also low, despite commentators voicing concerns over debt, while growth is also well above most markets.’
De Mello Chinese government debt is particularly attractive at present due to its limited correlation to the wider market, as well as its limited links to the performance of US treasuries.
‘That is the really interesting part from a portfolio construction point of view,’ he said. ‘It aids diversification and having a country which can produce yield without having the same correlations as the bulk of the market is really appealing in a low yielding world.’
In terms of positioning, De Mello said he had added ‘meaningful’ exposure to onshore Chinese government debt across a number of portfolios and accounts.
‘We have added it where we have found other markets are not performing as strongly, we have seen markets such as Hong Kong, where the government bond yields are low, as well as in Thailand. So, if we are talking about zero-sum allocations, we have added to China at the expense of these two.’
Elsewhere in his portfolios, De Mello said he is drawn to markets where the central banks are showing the ability to manoeuvre, as well as countries with positive yields and growth expectations.
‘We have recently seen the Reserve Bank of India cut rates, while the Fed is likely to hike, so we have policy divergence which can be taken into account. We are seeing opportunities in markets which were previously quite beaten down but showing resilience, so Indonesia would sit there as well following a period of volatility.’