More Opportunities; Higher income

  • 06 Feb 2018

    In the year ahead, we continue to target higher income opportunities based on “high conviction, best ideas” by investing primarily in the Greater China region. A more flexible application of our unique issuer and sector constrained approach remains key to our investment process for ensuring diversification and managing volatility.

    1. What is your investment outlook for China High Yield in 2018?

    Heading into 2018, China continues to deliver robust yet moderating growth, whilst the fiscal and monetary policy remain supportive for the China high yield market. Improving credit profiles with better balance sheet liquidity, lower cost of funding and strong technicals are all contributors to the strong returns in 2017.

    China’s GDP now accounts for more than 30% of the global GDP which demonstrates its global significance. The economy is moving into a moderate yet higher quality growth period with an improving domestic financial market which are supportive. On the other hand, the continuous regulatory fine-tuning and high debt burden pose concerns. All of the above factors give a generally supportive backdrop with manageable near-term risks.

    Looking ahead, the factors to watch are: RMB volatility and capital flows, policy dynamics in property sector and consumption trends. These can give insights to onshore liquidity situation, market technicals, regulatory tightening and the pace of transition to a consumption-based economy, which can pose near term risks and volatilities to the offshore USD credit market. Finally, as the Chinese economy continues to grow and the financial market continues to evolve, these also give rise to an evolving opportunity set with huge growth potential, where attractive investment opportunities can be captured through rigorous credit and instrument selection with a strong awareness of idiosyncratic risk.

    2. What do you think could most surprise investors next year?

    As mentioned in the Asian high yield outlook, a potential surprise for investors is related to the widely expected China slowdown in 2018. However, the government stimulus effort in 2016 could potentially have a lasting effect in the economy and support a longer period of moderate growth than many have expected. This is backed by the supportive fiscal and monetary policy as well as the transition of the economy from manufacturing to more service-based industries. The moderate yet higher quality growth can provide a more sustainable economy for China in the long run, which also benefits both onshore and offshore China high yield markets.

    Another surprise for investors is a faster development of China’s financial market with additional structural improvements and increasing foreign participation. These improvements are namely: increasing credit differentiation, introduction of an interest rate corridor and gradual liberalisation of RMB. The more structured and diversified financial markets with increased breadth and depth can provide more investment opportunities, which continue to gain traction from international investors. All these factors can continue to aid the growing global importance of China’s financial markets, regardless of whether the investors are investing in the onshore or offshore China bond market.

    3. How do you plan to capture the best opportunities and add value for investors?

    Looking ahead, considering the relatively tight valuations, income is likely the main contributor to total return for this strategy in the near- term. The Fund positioning continues to focus higher yielding, short-dated instruments which are less sensitive to interest rates movements.

    Our Fund’s “high conviction, best ideas” approach allows us to capture higher return per unit of risk taken. This is supported by our focus on idiosyncratic risks with rigorous credit and securities selection provided by our extensive research team and full-fledged investment team in China. A more flexible application of our unique issuer and sector constrained approach provides diversification and at the same time allows a more flexible sector positioning in order to take advantage of sector dynamics and market trends in this evolving opportunity set.

    In terms of sectors, whilst property will likely remain as a core part of the market, consumption, retail and healthcare sectors for example are sectors with meaningful potential. They are supported by higher discretionary spending and a pursuit of a better-quality life, as the middle-class continues to grow in China. Sectors like, renewable energy and other environmentally related industries will also benefit from alignment of infrastructure pro-growth government policies.

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    BRYAN COLLINS is a portfolio manager based in Hong Kong at Fidelity International. He joined Fidelity in 2006 as a fixed income trader and became lead portfolio manager for Asian high yield in 2009. Prior to joining Fidelity, Bryan held a variety of roles in Credit Suisse Asset Management in Sydney, starting as a client consultant responsible for fixed income in 2000, before eventually becoming senior trader for fixed income and foreign exchange.