NN IP: China to be positive contributor to Asian and EM debt despite any increase in defaults

NN Investment Partners (NN IP) is pleased to announce that NN (L) Asian Debt (Hard Currency) records it eight consecutive year of outperforming its benchmark¹ and reached the milestone of USD 500 million in Assets under Management, despite China’s default rates that are set to rise. Joep Huntjens, Lead Portfolio Manager, Asian Debt Hard Currency at NN IP says that this is will be a positive development in the long term.

Joep Huntjens

Joep Huntjens currently holds an overweight exposure to China through NN (L) Asian Debt (Hard Currency) (the ‘Fund’), for which he is Lead Portfolio Manager. The Fund saw its assets under management rise by 25% in the first half of 2016 and now holds over USD 500 in AuM².

Joep Huntjens believes overcapacity in China is very high, especially in industries linked to the state that have seen limited defaults because of state support. He commented: “China cannot continue supporting companies in such industries though, especially in the light of the reforms it is implementing."

“The default rate in the Chinese onshore bond market has been 0% for many years, which is not a natural situation. In the coming years there will be more defaults, which in our view is a good thing. It is the only way to get a healthy credit environment where investors – including Chinese – start to demand a compensation for credit risk.”

China’s debt is attractively priced, partly because of a benign technical picture. There is a lot of demand for bonds, but there is also some good supply. In a lot of other Asian markets, supply has been very low, driving up prices to levels less attractive versus those in China.

Joep Huntjens added that China will continue to be a significant factor for Emerging Market Debt generally: “The authorities will continue to allow economic growth to slow down gradually, which is not a bad thing for the bonds we invest in. It is true that China has set an annual growth target for the coming years of 6.5%, but that would not go together with reducing the large debt overhang."

“China has the means to achieve its growth target but, in the end, it would increase the longer-term risks and would go against their reform targets. It would be better if China allows GDP growth to be lower than 6.5%.”

The Fund also has overweight positions in Indonesia and India. Indonesia is favoured because its GDP growth is strong at around 5% and the political situation is positive. India is implementing a lot of structural improvements, although it will take time for these to have an impact on the economy. Chinese infrastructure and housing.

¹ JP Morgan Asia Credit Index. Based on bid to bid prices, net income reinvested, gross of management fees, eight years to 30 June 2016
² As at 30 June 2016