We see a number of attractive entry points for fixed income investors seeking exposure to China bonds and though it remains a relatively new bond asset class, it is one in which we believe should benefit from the long-term appreciation of the Chinese Renminbi.
While the Renminbi has recently strengthened against the US dollar, our view is that the currency remains structurally undervalued with significant potential for appreciation relative to not only the US dollar, but other major currencies too.
The Baring China Bond Fund gains exposure to the nascent asset class through bonds issued by the Chinese government, state agencies, institutions and companies based in China, or with core economic activities in China and related markets like Hong Kong. In addition, we can invest in Renminbi-denominated bonds issued by institutions outside of China that find the growing offshore Renminbi bond market an increasingly attractive and liquid source of funding.
Within the Fund we also have the flexibility to manage risks by allocating across assets which we believe can provide several sources of returns. For example, when we see the market as displaying pronounced levels of risk adversity, we would typically increase exposure to Chinese government bonds and quasi-agency bonds denominated in US dollars. While enhanced risk appetite in the market may suggest to us a need to hold more corporate bonds and bonds denominated in Renminbi.
Over 80% of the Fund is currently invested in the offshore Renminbi bond market and includes issues from a range of high quality corporates with international operations, like Air Liquide, the French energy company, Caterpillar, the US equipment maker, and Volvo, the European car-maker. We also believe bonds issued by local state-related institutions such as the Agricultural Development Bank of China can provide the Fund with an attractive combination of yield and investment grade quality.
The balance of the Fund's portfolio (at around 15%) is invested in US dollar-denominated credits issued by corporates which have important links to China, such as property group Nan Fung, mining firm Yancoal, and Cosl, the oil drilling specialist.
In addition, we are favouring bonds from issuers with superior credit quality and are particularly positive on credits rated between BBB and AA. We also target credits which offer the potential for a positive re-rating as well as yield enhancement to the portfolio as a whole.
In terms of sectors, we are positive on banking and finance, followed by property, industrials, utility and power. We view the banking and finance sector as offering better liquidity because generally they have been the most frequent issuers within the offshore Renminbi market over recent times.
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