All the Chinese Assets Loved by World’s Biggest Money Managers

(Bloomberg) --

As the world struggles to price the economic impact of the coronavirus, Chinese assets have offered a spot of relative calm for foreign investors looking to escape volatility elsewhere.

The country is home to the only stock market among the world’s 20 largest that is yet to slip into bear territory. Investors say they are confident of a stable currency outlook, with the yuan at its strongest level since May last year versus a basket of trading-partner currencies. Chinese government bonds are seen as attractive in a world where treasury yields are nearing zero.

To be sure, the extent to which China can continue to offer shelter is debatable. Dismal economic data this week underlined the mounting challenges for the country given its reliance on trade with a world gripped by a global pandemic. Overseas investors net sold Chinese stocks for a fifth straight session on Tuesday, and the CSI 300 Index briefly touched a seven-month low.

But other assets continue to find favor with foreign investors:

Yield Matters

Eric Liu, portfolio manager China Bonds, BlackRock (Singapore) Ltd.

We plan to increase Chinese bond holdings and believe other international investors will also do so since the U.S.-China spread offers remarkable advantage in value and margin of safety. Five-year or longer duration is our pick since the spread between long- and short-end is at a medium level and has room to compress in the future.

Haven Characteristics

George Sun, head of global markets, Greater China, BNP Paribas China Ltd.

If you watch the correlation between CNH and JPY, Chinese assets now have quite obvious characteristics of safe-haven assets. We recommend increasing long duration positions of government bonds and policy bank bonds. We expect the yuan will head to 6.80 against the dollar in the coming six months, though at this moment the yuan might also face depreciation pressure due to USD liquidity tightening.

Philosophical Differences

Paras Anand, chief investment officer for Asia Pacific at Fidelity International

Statements from the People’s Bank of China last year suggest a philosophical distance from the policies of other central banks, preferring to use a broader combination of fiscal and monetary measures to support the economy as trade tensions escalated over the last 13 months. This is important as investors think through whether the USD, which has been a default safe haven currency, will continue to be so in the same way over the coming years.

Not Like the Others

Cary Yeung, head of greater China debt at Pictet Asset Management (HK) Ltd.

Chinese bonds have low correlation with other asset classes and continue to offer attractive yields while staying relatively immune from market volatility. We remain confident that now is a good entry point for foreign investors given the still-decent yield and a relatively stable currency outlook.

The yuan has been, and is expected to remain, relatively stable against other emerging market currencies on the back of inflows into the bond market. Also playing a part in contributing to the yuan’s stability are shrinking imports, a decline in the short-to-medium term of outbound traveling as well as the wide interest rate differential between China and other developed markets, including the U.S.

Risk-off

Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset Management Hong Kong Ltd.

As the USD comes under pressure, we do not think the PBOC is looking for the yuan to appreciate. We think they will try to keep the currency close to 6.95 to 7 per USD. In the global risk-off environment, a lot of volatilities are on the rise, but there is a lot of resilience in this currency.

At the moment we expect the spread to compress back to 150 bps in the second half of this year. If the situation get worse, we expect the spread to go to 100 bps.

Easing Expectations

Jason Pang, a fixed-income portfolio manager at JPMorgan Asset Management

Although the rate of reported new virus infections has declined meaningfully in China, the economy is likely to remain under some degree of pressure. Taking this into consideration, we should still expect some targeted easing within this market. That will continue to gradually support Chinese government bond yields.

Opportunities Overseas

Edmund Goh, Asia fixed-income investment director, Aberdeen Standard Investments

Onshore Chinese credit has gotten more expensive and we see better spread value in USD markets for Chinese issuers. We are positioned long duration against the benchmark and are looking for good entry opportunities for some Chinese USD issuers in the Asian markets.

The ability to hedge the yuan will matter more than a view on the yuan for now. Volatility in the yuan has picked up in the last 12 months compared to the past.

Could Be Worse

Chaoping Zhu, Global market strategist at JP Morgan Asset Management.

There used to be strong expectation for a V-shaped rebound in the second quarter when domestic activities normalize. However, the rebound might be weaker than expected should the global economy enter a recession in the second quarter. This might cause additional pressure on the A-share market, although there are still more certainties than in the other markets.

©2020 Bloomberg L.P.

With assistance from Bloomberg