EASTSPRING INVESTMENTS ASIAN HIGH YIELD BOND MY FUND ( FUND ) There are some concerns by investors in regards to the Fund. Below are the key questions that we believe our investors have at this point of time. Question 1: What is the impact of rising default in China on Asian high yield bond market? Answer: First of all, it should be noted that the China corporate exposures in the target fund of the Fund is mainly through the USD-denominated bond market. On the other hand, the defaults occurred mainly in the China onshore bond market, and they are almost all from companies that have never tapped the offshore USD bond markets. Furthermore, even in challenged sectors, there is a wide spectrum of companies, from the very well run to zombie companies. Only those at the better end of the spectrum are able to tap the offshore USD bond markets. These are thus two different universes, with different market composition and dynamics. Based on Goldman Sach s data, the cumulative amount of default in China's onshore bond market since the first case in 2014 to Aug 2016 reached RMB44.67bn. However, compared to the sheer size of the China onshore bond market, the cumulative default rate is still low (<1% of the entire bond market). Commodityrelated players have accounted for most of the defaults to date. We expect the onshore default rate to accelerate amid China's economic slowdown and the authorities' continued effort to reduce over-capacity in various sectors. The table below shows the profile of some of the defaulted onshore bond issuers. The target fund of the Fund does not hold any of these bonds:
Source; Goldman Sachs, August 2016 Question 2: Will Chinese property issuers face increased refinancing pressure in the next one year? Answer: While USD bond supply from Chinese property issuers is likely to increase due to upcoming maturities and calls, refinancing risks remains manageable. The sector s overall liquidity remains adequate, benefiting from strong sales collection in recent months and the opening of the domestic bond market to developers. The amount of debt that will be maturing in the next 12 months is relatively small as seen from the chart below: Source; National Bureau of Statistics of China, Wind Information, Moody s investors Service estimates, May 2016 We are also not seeing signs of market stress from the pricing of recent new high yield issuances. Chinese high yield property issuers are still able to tap the USDbond market at yield levels that are relatively tight compared to historical levels, although we note that recent performance of new issuances has been more uneven following the tightening of property measures in higher tier cities.
Even for Central China Real Estate, although its recent new issue was priced higher than the initial indication (as the initial indicative pricing was too tight), its final pricing of 6.75% yield remains largely in line with the pricing of other single-b rated Chinese property bonds as shown in the chart below. The target fund of the Fund holds a small exposure of around 0.5% in Central China bonds, which represents a 0.2% underweight relative to benchmark. Source; JPMorgan, as at end September 2016 Question 3: Is there still value to be found in Asian high yield bonds? Admittedly, valuations of Asian bonds have become less attractive after the year-todate tightening of spreads seen this year. Asian credit spreads are trading at tight levels slightly below the long-term average while the yield level has hit an all-time low in part due to record low US Treasury yields. While current spread levels are at the lower end of the range seen over the past few years, they are still trading higher wider than the extreme tight levels seen before the Global Financial Crisis. We have also seen similar spread levels before in the Asian USD bond history. At spread levels similar or even lower than present levels, investors who invested at those levels still managed to reap positive returns over a medium-term horizon. Looking back since the inception of the representative index, investors who invested at the low spread levels seen in 2007, 2010 and 2013 (refer to table below) have been able to reap more than 20% returns over a 3-year investment time horizon.
Previous lows Spread level (basis points) 3Y return since previous lows Apr-07 262 31.3% Dec-10 517 23.1% Dec-13 480 24.4%* * From Dec-13 to end Sep-16 only While past performance may not be the best indicator for future performances, we believe that the current market environment still favors the medium-term investor. With interest rates likely to stay low for longer, all-in Asian bond yields remain decent relative to the developed markets and will continue to underpin investor demand. Increasing participation in the credit market by local investors, in particular Chinese onshore investors and banks, is also expected to help shore up demand for Asian bonds. This trend has been gaining strength over the past year and according to JP Morgan, local investors now account for 76% of new Asian bond issues (as at the end of August 2016). Fundamentals in the region continue to be supportive and Asia remains one of the few bright spots. On top of that, countries such as India and Indonesia are still seeing great progress in terms of economic reforms. It is likely that monetary policies of major economies will remain highly accommodative as global growth continues to be sluggish and inflationary pressures continue to be low. The chances for interest rates to surge substantially in the near term are thus limited and global liquidity is likely to remain abundant. Yield-seeking behavior will continue to be prevalent in such an environment. However, such yield-seeking behavior may cause risk assets to be susceptible to sentiment-driven market volatility, while credit fundamentals remains bifurcated in the high yield sector. It is therefore critical to remain mindful of credit fundamentals while investing in the market. Currently, we remain overweight in the Chinese property sector and Indian corporates, while taking on a more bottom-up driven, selective bets in other sectors.
Disclaimer This document is prepared for information purposes only and may not be published, circulated, reproduced or distributed in whole or part, whether directly or indirectly, to any other person without the prior written consent of Eastspring Investments Berhad. Investors are advised to read and understand the contents of the replacement information memorandum for Eastspring Investments Asian High Yield Bond MY Fund ( Fund ) dated 3 February 2016 ( Information Memorandum ) and Product Highlights Sheets for the Fund ( PHS ) before investing. The Information Memorandum and PHS are available at the offices of Eastspring Investments Berhad or its authorised distributors and investors have the right to request for a copy of the Information Memorandum and PHS. The Information Memorandum has been deposited with the Securities Commission Malaysia who takes no responsibility for its contents. Units will only be issued upon receipt of the application form. Past performance of the Fund is not an indication of its future performance. Unit prices and distribution payable, if any, may go down as well as up. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the Net Asset Value ( NAV ) per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV. Where a unit split is declared, investors are advised that the value of their investment in their respective currency class i.e. Malaysian Ringgit, US Dollar and Australian Dollar will remain unchanged after the issue of the additional units. Investments in the Fund are exposed to fund management of the target fund risk, country risk and currency risk. Investors are advised to consider these risks and other general risks as elaborated in the Information Memorandum as well as fees and charges involved before investing. Eastspring Investments companies (excluding JV companies) are ultimately whollyowned/indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV companies) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.