Our ETF of the month, the Tabula Haitong Asia ex-Japan High Yield Corporate USD Bond ESG UCITS ETF (TAHY), hit a sweet spot of high yields and strong returns in November as months of political and market turbulence in China were briefly allayed by a loosening of COVID-19 restrictions and government support for the country’s property sector.
Although the ETF is still down 32.9% over the past 12 months, as at 25 November, it shot up 14.4% in the last month alone, a significant figure even for high-yield ETFs and a rate of recovery only seen elsewhere within longer-dated UK gilts in the weeks following the Chancellor Kwasi Kwarteng’s ‘mini budget’.
Much like UK bonds, Chinese high-yield bonds – which make up 42% of TAHY’s basket – were buoyed by U-turns in political policy which restored confidence in the market.
In mid-November, the Chinese Communist Party (CCP) and its newly appointed Politburo Standing Committee announced a 20-point plan for a region-by-region rollback of its restrictive ‘COVID Zero’ policy, giving markets hope Chinese companies would be able to operate with fewer restrictions and the country’s economy would be able to bounce back from multi-decade-low GDP growth.
Elsewhere, China’s ailing property sector was given some welcome relief by the CCP. A year on from the Evergrande crisis, investors were still trying to second guess the government’s long-term response to the embattled sector, with property prices down year-on-year across three quarters of Chinese cities in August.
Participants were then given some reason for optimism in November as the CCP introduced 16 directives to promote “stable and healthy development” of the sector, a party spokesperson said at the time.
Tabula noted the move may be “the most crucial pivot since authorities began their 2020 clampdown on property sector financing”.
Michael John Lytle, CEO of Tabula, commented: “The latest measures to support China’s property developers are the most concrete to date.
“They provide a clear sign the government is seeking to restore the confidence of home buyers through the completion of unfinished building projects while also loosening home purchase restrictions to stimulate demand.”
Chinese high yield property rallied 28% in the first half of November, with property sector bonds making up 25% of TAHY’s index, the iBoxx MSCI ESG USD Asia ex-Japan High Yield Capped index.
Previously, the ETF had a greater overweight to the sector with a 48.5% allocation to emerging market real estate bonds last September, likely owing to its high 50% sector cap and its requirement to capture bonds with issuance of over $400m from companies not significantly involved in sectors excluded by ESG filters.
However, even the volatile first 10 months of the year did not deter investors from seeking out TAHY. The ETF has seen $125m inflows this year, as at 17 November, the second highest of any Europe-listed high yield ETF.
As investors pulled billions from Chinese sovereign bonds as US Treasury yields surged, more adventurous players sought out TAHY, which in mid-November had a gross yield of 27%.
Of course, the product’s rare window of surging returns and sky-high yields cannot be maintained and one side of the equation must give.
As daily COVID-19 cases in the country surged to 33,000 at the end of November, the CCP faces potentially its biggest challenge since the Tiananmen Square massacre, with protestors resisting the idea of lockdowns being reinstated.
While the manufacturing hub of Chongqing rolling out strict lockdowns will come as a blow, China’s State Council looked to prevent a rout of market confidence by calling on the People’s Bank of China (PBOC) to consider interest rate cuts while a number of large Chinese banks agreed to provide RMB 200bn in credit facilities to private developers.
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.