Lo­cal bonds be­com­ing more at­trac­tive to for­eign in­vestors

China Daily (Canada) - - ACROSS CANADA - By ZHENG YANGPENG zhengyang­peng@ chi­nadaily.com.cn

A low in­ter­est rate en­vi­ron­ment has made China’s lo­cal bond mar­ket at­trac­tive to global in­vestors. But care­ful scru­tiny of in­di­vid­ual cor­po­rate bonds is also es­sen­tial, ac­cord­ing to a lead­ing global as­set man­ager.

Ri­cardo Adrogué, head of emerg­ing mar­kets debt at Bab­son Cap­i­tal Man­age­ment, said the weaker growth is not nec­es­sar­ily a bad thing in the eyes of in­vestors, be­cause that could spur fur­ther rate cuts, which in turn could spark a rally in lo­cal bond sales.

“Should China open its on­shore mar­ket, it’s most likely I would in­crease ex­po­sure to it. But I would be more se­lec­tive in which cor­po­rate names we picked,” he said.

Bab­son has as­sets worth $223 bil­lion un­der man­age­ment.

Its cur­rent ex­po­sure to China is con­cen­trated in US dol­lar-de­nom­i­nated bonds, is­sued by Chi­nese firms in over­seas mar­kets.

The emerg­ing-mar­ket debt unit led by Adrogué also in­vests heav­ily in sov­er­eign notes, but it lacks ex­po­sure to China be­cause the coun­try is yet to is­sue sov­er­eign debt de­nom­i­nated in dol­lars or other hard cur­ren­cies.

Bab­son is yet to ap­ply for a quota to in­vest in China’s on­shore mar­ket, as Adrogué’s op­er­a­tion was launched only two years ago and its fo­cus has been on other emerg­ing mar­kets.

He said, how­ever, it plans a stronger fo­cus on the China mar­ket, af­ter ef­fec­tively be­com­ing fully in­vested in other mar­kets.

The com­pany has about 8 per­cent of its port­fo­lio in Chi­nese cor­po­rate bonds.

“Un­like the eq­uity mar­ket, the debt mar­ket is di­rectly re­lated to mone­tary pol­icy, which dic­tates in­ter­est rates,” he said.

China’s cen­tral bank cut head­line in­ter­est rates re­cently for the sixth time since last Novem­ber.

The con­sec­u­tive se­ries of rates cuts, and a low­er­ing of the re­serve re­quire­ment ra­tio, have seen money get­ting di­verted from the eq­uity mar­ket into the debt mar­ket, which has driven an un­prece­dented rally since Au­gust.

Adrogué said the Chi­nese econ­omy is not over­heated, and there is still room for fur­ther eas­ing, and so the chances of a bond mar­ket bub­ble form­ing were slim.

“If prices fall, the gov­ern­ment could ease poli­cies to the point that al­most forces them to back up,” he said.

De­spite the gen­eral op­ti­mism in the lo­cal mar­ket, he feared, how­ever, that China’s cap­i­tal out­flow has ac­cel­er­ated, with higher yields off­shore push­ing more Chi­nese in­vestors to move their hold­ings into off­shore debt.

In Septem­ber, the coun­try’s com­mer­cial banks sold a net $109.2 bil­lion in for­eign ex­change, the high­est since Jan­uary 2010, ac­cord­ing to China’s for­eign ex­change reg­u­la­tor.

Adrogué said the com­plex mar­ket con­di­tions have high­lighted the value of mi­cro­anal­y­sis.

His team had been in­vest­ing mostly in com­pa­nies in the real es­tate and fi­nance sec­tors — two ar­eas in­te­grated with the broader econ­omy.

He said his China an­a­lysts visit the coun­try quar­terly to gauge the health of those two sec­tors par­tic­u­larly, be­fore se­lect­ing pos­si­ble cor­po­rate bond tar­gets.

“We don’t think the tra­di­tional EBITA-ap­proach is ap­pro­pri­ate. Nei­ther do we fo­cus on credit rat­ing agen­cies. We have a very strong bot­tom-up anal­y­sis,” he said.

EBITA refers to earn­ings be­fore in­ter­est, taxes and amor­ti­za­tion — a widely used met­ric for a com­pany’s ef­fi­ciency and prof­itabil­ity.

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