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Chinese equity sell-off creating credit opportunities, says EMD star

Chinese equity sell-off creating credit opportunities, says EMD star

Chinese bonds are starting to feel a pinch after the massive equity sell-off but there's no reason to divest from the country, according to Citywire AAA-rated V.
Speaking to Citywire Global, the manager of the Investec Emerging Markets Corporate Debt fund, which she co-manages with Citywire +-rated Peter Eerdmans, said the use of leverage used by locals is compounding the correction as some Chinese are taking out margin loans to finance their equity positions.

‘We thought we’d see the knock on effect of the equity collapse come through in Chinese bonds particularly from high yield names, but we're also seeing it in investment grade,' she said.
‘We continue to feel that the authorities will do whatever they can. They have certainly intervened already quite a lot to stabilise the equity markets,’ she added.
Ultimately, Harling doesn’t see any reason for bond investors to take their money out of China. On the contrary, she thinks there might be some interesting buying opportunities.
‘The majority of our portfolio is in investment grade, which are quality companies, we also feel comfortable adding to the more risky portion of the market at the right valuation levels.’

Chinese property play

Speaking about the sectors within the bond arena that will benefit the most from China's looser monetary policy, Harling named real estate.
‘Having reduced some of our Chinese real estate exposure earlier on in the year, as valuations became more fair value, we’re using this correction to increase our position,’ she said.
‘We don’t expect a significant slowdown in China: we’ve always had a more conservative estimate of economic growth, but we do feel that the policy is supportive towards the real estate market.’

Brazilian and Russian plays 

Sector specialisation is currently one of the key focuses for the manager as macro factors and commodities prices are affecting valuations.

‘There is headline noise especially in certain countries such as China, Russia and Brazil - where there has been increasred headline risk coming from a political and corruption standpoint. Therefore sector specialisation has become important this year along with company selection, as you have to cherry pick the right investments.'
Harling's fund is not invested in Russia as she doesn’t see any opportunities that are worth the risk. Exposure to Brazil is also at a historical low, though the manager is starting to re-increase this position.  
‘We cut back our Petrobras exposure in 2014 on concerns the company might go into a technical default. Once it became clear they could avoid that, we re-entered,’ she said.
Overall, the manager said during risk-off periods, companies in big countries such as Brazil tend to underperform.

‘The bonds that will perform best in this scenario are those most heavily correlated to US treasuries, A and AA names in the Middle East and high quality Asia.'

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