Offshore renminbi bonds offer value: Cecilia Chan interview

The fixed income chief investment officer for Asia-Pacific at HSBC Global Asset Management on the dangers of inflation, and why the region’s bond markets still offer compelling value, despite significant spread compression in recent months

Cecilia Chan, HSBC: bullish on renminbi bonds

Having originally joined HSBC Global Asset Management in 1994, Cecilia Chan now heads up its Asian fixed income team, managing both the Hong Kong and Asia portfolios. As well as overseeing institutional mandates, Chan also manages three retail bond funds. Her team, which consists of seven fund managers and four credit analysts, manages over US$23 billion of assets, as of the end of 2010.

In a lengthy interview with Credit, Chan discussed where she sees value in the region’s bond markets and whether they are more resistant to external shocks than in the past.

Traditionally, the focus of Asian investors has mainly been on equities. Has that changed in recent years?

Until the last few years, investor interest was focused on equities because that is the area where people dream they can get rich. But if you look at the performance of equities over the past decade, the average return wasn’t that attractive. Given the volatility in the market, investors started to look at alternatives. They have come to appreciate that fixed income gives them the opportunity to get attractive returns with lower volatility, and they want that in their portfolios.

This interest has filtered down from the institutional investors to private banking clients specifically. One of the key differences between bonds and equities is that equities are exchange-traded and people can buy and sell in smaller amounts. There are some bonds that trade on exchange – household names that retail investors are familiar with and they trade those bonds in small amounts. But typically bonds are traded in bigger amounts, and [outside the institutional space] only private banking clients will have the capacity to buy bonds on that scale. 

What investment themes are you focusing on right now?

Credit spreads have tightened a lot since early 2009 as a result of interest rates being kept close to zero in the US and the strong liquidity in the market. But right now, the major concern for many investors is inflation: not only in the emerging markets, but in the advanced economies where we continue to see high commodity prices. The only direction US interest rates can move is higher; it’s just a matter of when that happens. The market is very sensitive on inflation figures and growth data, and the possibility of rate hikes.

Does that make you cautious on the current outlook?

It is time to be very selective on fixed income because the market has already enjoyed two consecutive years of good returns in 2009 and 2010, with credit spread performance perhaps even stronger than I would have anticipated. I still expect Asian credit spreads to maintain a tight level: the market is supported by strong fundamentals, with healthy corporate balance sheets, and generally low levels of gearing. That being said, the main spread tightening has already happened, so now is the time to be selective and look for relative value, particularly in the high yield area.

Where do you see opportunities in the market?

One issue concerns the development of the offshore renminbi bond market [known as the CNH market]. A lot of investors, including ourselves, are optimistic on the long-term appreciation potential of the renminbi, so there is good demand for deals denominated in the currency. Investors can sit on those investments and benefit from the long-term appreciation of renminbi.

Does the potential for currency appreciation offer enough compensation for the relatively low coupons?

It depends on what sort of investor you are. If you are a US investor and invest in renminbi, annually you can expect four to five percent appreciation [against the dollar]. At the moment for CNH bonds, we have been focused on the short-dated deals with maturities of two or three years that offer around two percent yield, depending on the quality of the credit. When you factor in the yield and potential currency appreciation, that offers reasonably good returns, even compared to dollar-denominated bonds. The yield is similar for deals with the same rating. There have also been some unrated issuers that have come to the CNH market, and it is true they would have to pay a higher yield if they issued in dollars. You have to be selective on those unrated names.

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Offshore renminbi bonds offer value: Cecilia Chan interview

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