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Investing in Chinese Onshore Bonds

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Investing in Chinese Onshore Bonds Investing in Chinese Onshore Bonds RAYMOND SAGAYAM, CIO FIXED INCOME 26 February 2019 Frankfurt, IMK For professional investors only CONTENTS 1. Why invest in Chinese onshore bonds? slide 3 2. How does Pictet AM invest in the asset class? slide 15 3. Performance & positioning slide 23 4. Outlook slide 28 5. Appendix slide 30 2 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only 1. Why invest in Chinese onshore bonds? 3 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only WHY INVEST IN CHINA’S ONSHORE BOND MARKET? An emerging asset class of global significance Attractive yields & returns Diversification benefits A+ rated Chinese 5yr govt Low correlation with other bonds yielding 2.9% 1 asset classes Long-term appreciation potential of RMB 1 As at 31 Jan 2019 Too big to ignore Increasing global recognition 2nd largest economy in the China onshore bonds world waiting to be included in major global bond indices 3rd largest bond market in the world 4 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only ATTRACTIVE YIELDS IN LOCAL CURRENCY Chinese onshore bonds yield double vs developed govt bonds China govt bonds yield more than similar rated countries (A+/A1) 4% 4% 3,3% 3% 2,9% 3% 2,9% 2,4% 2% 2% 1,6% YIELD 1,2% 1% 0,9% 1% YIELD OF 5YR GOVT BOND 0% 0,2% 0,1% -0,2% 0% -0,3% -0,2% -0,1% -1% 5YR 5YR JAPAN 5YR UK 5YR US 5YR CHINA 5YR CHINA GERMANY GOVT GOVT GOVT GOVT POLICY GOVT BOND BOND BOND BOND BANK -1% BOND BOND JAPAN SLOVAKIA IRELAND SLOVENIA ISRAEL CZECH REP CHINA Source: Bloomberg; as at 31 Jan 2019 Source: Bloomberg; as at 31 Jan 2019 5 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only LOW VOLATILITY Low volatility compared to developed fixed income, emerging fixed income, developed equities and Chinese equities 30% 25%25% 25%25%25% 25% 24%24% 24% 19%19% 19% 20% 15%15% 15% 14%14% 14%14%14% 14% 12%12% 12% 10% 9%9% 9% 8%8% 8% ANNUALISED VOLATILITY 7%7% 7% 6%6% 6% 5%5% 5% 4%4% 4% 4%4% 4% 4%4% 4% 2%2% 2% 0% US EQUITIES COMMODITIES US GOVT BONDS ASIA USD BONDS ASIA LOCAL BONDS EMERGING EQUITIES EMERGING USD BONDS EURO AGG BONDS (EUR) ASIA EX-JAPAN EQUITIES EMERGING LOCAL BONDS CHINA LOCAL BONDS (CNY) CHINA LOCAL BONDS (USD) EUROPEAN EQUITIES (EUR) GLOBAL HIGH YIELD BONDS SHANGHAI COMPOSITE (CNY) SHANGHAI COMPOSITE (USD) EMERGING CORPORATE BONDS Source: Chinabond, JP Morgan, HSBC, Bloomberg. All indices are total return and in USD unless indicated. Based on monthly data from 31 Oct 2008 – 31 Dec 2018 6 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only DIVERSIFICATION BENEFITS Low correlation with other asset classes 100% Perfect positive correlation 80% 60% 45%45% 45%41%41% 41% 38%38% 38% 40% 30%30% 30% 26%26% 26% 22%22% 22%21%21% 21%20%20% 20% 18%18% 18%17%17% 17%16%16% 16% 20% 7%7% 7% 7%7% 7% 5%5% 5% 0% -20% -40% -60% -80% CORRELATION WITH CHINESE ONSHORE BONDS Perfect negative correlation -100% US EQUITIES COMMODITIES US GOVT BONDS ASIA USD BONDS ASIA LOCAL BONDS EMERGING EQUITIES EMERGING USD BONDS EURO AGG BONDS (EUR) ASIA EX-JAPAN EQUITIES EMERGING LOCAL BONDS EUROPEAN EQUITIES (EUR) GLOBAL HIGH YIELD BONDS SHANGHAI COMPOSITE (USD) EMERGING CORPORATE BONDS Source: Chinabond, JP Morgan, HSBC, Bloomberg. All indices are total return and in USD unless indicated. Based on monthly data from 31 Oct 2008 – 31 Dec 2018 7 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only TOO BIG TO IGNORE Second largest economy in the world Third largest bond market in the world Debt market-to-GDP (%) UNITED STATES 20,0 UNITED STATES 40,1 200 JAPAN 5,1 JAPAN 13,4 266 CHINA 13,8 CHINA 12,3 89 UNITED KINGDOM 2,9 UNITED KINGDOM 6,2 215 FRANCE 2,9 FRANCE 4,8 168 GERMANY 4,1 GERMANY 3,8 93 ITALY 2,2 ITALY 3,4 157 CANADA 1,7 CANADA 2,4 139 BRAZIL 2,1 BRAZIL 2,3 113 NETHERLANDS 0,9 NETHERLANDS 2,3 240 SPAIN 1,5 SPAIN 2,1 143 AUSTRALIA 1,5 AUSTRALIA 2,0 136 KOREA 1,6 KOREA 1,9 117 IRELAND 0,4 IRELAND 0,9 224 0 5 10 15 20 25 0 10 20 30 40 NOMINAL GDP (USD TN) SIZE OF DEBT SECURITIES MARKET (USD TN) Source: Pictet Asset Management, BIS, CEIC, Datastream; as at Dec 2018 Source: Pictet Asset Management, BIS, CEIC, Datastream; as at Dec 2018 8 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only INCREASING GLOBAL RECOGNITION China weight set to increase in global indices RMB recognised as IMF reserve currency in December 2015 OUTSTANDING DEBT SECURITIES (USD TN) GLOBAL AGG WEIGHT (%) SDR WEIGHTINGS 40 Old (2010) New (2016) 35 U.S. dollar 41.9% 41.73% 30 25 Euro 37.4% 30.93% 20 Chinese yuan n/a 10.92% 15 Japanese yen 9.4% 8.33% 10 5 Pound sterling 11.3% 8.09% Source: IMF; as at Jan 2016 0 ITALY SPAIN CHINA JAPAN BRAZIL FRANCE CANADA S.KOREA IRELAND GERMANY AUSTRALIA NETHERLANDS UNITED STATES UNITED UNITED KINGDOM UNITED Source: Bloomberg Barclays Global Agg, CEIC, Datastream, Pictet Asset Management; as at 31 May 2018 9 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only CHINA ONSHORE BONDS SOON TO BE ADDED TO MAJOR BOND INDICES › In March 2018, Bloomberg Potential inflows driven by index inclusion announced the addition of 180 China sovereign and quasi- sovereign bonds to its flagship 160 fixed income index, the Global 140 Aggregate 120 › Inclusion will begin in April 2019 and will be gradual, 100 with China reaching an 80 estimated final weight of 5.5% representing potential 60 inflow of approx USD100bn POTENTIAL INFLOWS (USD BN) 40 A milestone recognising the › 20 asset class; other index providers may follow 0 BLOOMBERG BARCLAYS GLOBAL AGG FTSE WGBI JPM GBI-EM GLOB DIV Est China › China bond index inclusion weight 5.5% 5.3% 10% could result in inflows of up to Source: Standard Chartered Research; as at Mar 2018 USD286bn 10 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only CHINESE ONSHORE BONDS ARE DISTINCT FROM EMERGING MARKET DEBT China onshore debt has a favourable risk-return profile Chinese onshore debt is large with attractive characteristics 7% CHINESE EMERGING ASIA ASIA USD LATAM ONSHORE LOCAL LOCAL DEBT LOCAL DEBT DEBT DEBT DEBT LatAm local debt 6% Market val (USD bn) 4,900 1,200 610 900 510 Asia USD debt Chinese onshore debt Asia local debt 5% Yield (%) 3.5 6.2 4.2 5.3 7.4 Emerging local debt 4% Duration (yrs) 4.0 5.2 6.5 4.4 4.3 Average rating BBB* Baa2/ A2/A Baa1/ Baa3/ 3% (A)** BBB BBB+ BBB- RETURN ANNUALISED Source: Bloomberg Barclays, JP Morgan; as at 31 Jan 2019 2% Market cap, yield, duration and average rating are shown for the following indices: Chinese Onshore Debt: Bloomberg Barclays China Composite Emerging Local Debt: JPM GBI-EM Global for market val, Global Div for yield, duration and rating Asia Local Debt: JPM JADE Broad Asia USD Debt: JPM Asia Credit Index LatAm Local Debt: JPM GBI-EM Global Latin America 1% * Estimated internal rating for Bloomberg Barclays China Composite; Source: Pictet Asset Management ** Average rating of portfolio; Source: Pictet Asset Management 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% ANNUALISED VOLATILITY Source: ChinaBond, JP Morgan; based on monthly data from 30 Sep 2005 to 31 Dec 2018 All indices are total return and in USD 11 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only CHINESE ONSHORE BONDS HAVE BEEN STABLE THROUGH SOME TURBULENT TIMES Low / no drawdowns compared to EM local debt, Asia local debt, Asia USD debt, LatAm local debt & EM USD debt 10% 5% 0% CHINA ONSHORE DEBT -5% EM LOCAL DEBT ASIA LOCAL SOV DEBT ASIA USD DEBT -10% LATAM LOCAL SOV DEBT Drawdown over the period the over Drawdown EM USD SOV DEBT -15% -20% -25% GREAT FINANCIAL CRISIS EU SOVEREIGN DEBT CRISIS TAPER TANTRUM CNY DEVALUATION TURKEY / ARGENTINA MARKET MOVE Source: Chinabond, JP Morgan. All indices are total return and in USD. Based on the following periods: Great Financial Crisis (Aug-Oct-2008); EU sovereign debt crisis (Aug-Nov 2011); Taper tantrum (8May – end 2013); CNY devaluation (10 Aug 2015); Turkey / Argentina move (Aug 2018) 12 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only * Foreign * Foreign ownership for China onshore bond market overall India, Goldman Sachs Global Investment Research; as at May 2018 Source: Standard Chartered for China, Haver Analytics, IMF, Asian markets is very low bondonshore inChina participation Foreign FOREIGN OWNERSHIP OF LOCAL GOVERNMENT BONDS (%) 10% 20% 30% 40% 50% 0% CZECH REP SOUTH AFRICA INDONESIA PERU RUSSIA MEXICO POLAND FOREIGN PARTICIPATION LOW BUT INCREASING MALAYSIA COLOMBIA TURKEY ROMANIA Development Development Bank, Reserve Bank of HUNGARY THAILAND BRAZIL KOREA PHILIPPINES CHILE INDIA 2% CHINA * 13 For professional investors Pictetonly Asset Management Investing in Chinese Onshore Bonds But foreign ownership is on an increasingtrend is an foreign onownership But Source: Wind, Standard Chartered Research; as Oct at 2018 FOREIGN HOLDINGS OF CHINESE ONSHORE BONDS (CNY BN) 1000 1200 1400 1600 1800 2000 200 400 600 800 CGB 0 JUN 14 PFB SEP 14 DEZ 14 NCD MRZ 15 OTHER INTERBANK BONDS INTERBANK OTHER JUN 15 SEP 15 DEZ 15 MRZ 16 JUN 16 SEP 16 DEZ 16 EXCHANGE TRADED BONDS TRADED EXCHANGE MRZ 17 JUN 17 SEP 17 DEZ 17 MRZ 18 JUN 18 SEP 18 ACCESS IS IMPROVING Improving ease of access QFII / RQFII CIBM BOND CONNECT › Successive schemes have improved ease of Key date 2002 Feb 2016 Jul 2017 access Regulatory CSRC for license Pre-filing with Pre-filing with approval SAFE for quota PBOC PBOC › From QFII / RQFII to CIBM to Bond Connect, Quota Yes No No Eligible FI All cash bonds All cash bonds All cash bonds we have seen products and onshore IR derivatives Shift from quota-based to filing system Custody China China Hong Kong – Repatriation 3 months but no No restriction No restriction restrictions restriction for – Ease of custody arrangement (from China to open-ended funds Source: CSRC, SAFE, PBOC, JP Morgan research; as at Jul 2017 Hong Kong) – End of repatriation restrictions › With Bond Connect, the market is now effectively open to foreign investors 14 Investing in Chinese Onshore Bonds Pictet Asset Management For professional investors only 2.
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