2021 witnessed the recovery from one of the worst economic shocks in history, the COVID-19 pandemic outbreak in 2020. Thanks to the global connectivity, digitization, and active support of governments across the world, a gradual return to normality is taking shape. Financial markets, particularly in the developed world benefited hugely, both from this recovery as well as the stimulative monetary policies of central banks.

Looking at the various asset classes, particularly in the fixed income space, it was however not a walk in the park. The optimism which carried the global credit markets through 2020 was abruptly broken, starting as early as February. It became clear then that price pressures in the US might come back to bite the global economy. The concerns around US inflation and market narrative caused much volatility at the long end of the curve, and long-duration dollar bonds witnessed an aggressive sell-off from February to May period.

And before credit investors could settle in, the Chinese corporate credit markets blew up and started to swing wildly. In April 2021, offshore dollar bonds issued by investment-grade rated China Huarong plunged in value. China Huarong was incorporated in Beijing as China Huarong Asset Management, one of the four asset management companies approved by the State Council of the People's Republic of China and 57% directly owned by the Ministry of Finance. The saga began after the company missed an end-March deadline to release its 2020 financial results. Fears of default and contagion spooked the markets, causing credit spreads to widen out substantially. Following months of negotiations and deliberations, the company fully honored its offshore debts due in 2021 following the support and bailout of the Chinese government eventually.

As the Huarong saga was just about easing off, China Evergrande, the second-largest property developer by sales, reportedly hit a liquidity crisis, thereby causing Chinese property bonds and global markets to fall abruptly in September. Many global investors feared a repeat of a US ‘Lehman’ moment, which fortunately didn’t materialize. Having said that, the damage was done, and investors’ confidence was much shaken. As we write this note, the Chinese property sector remains in its doldrums, with many industry players continuing to face funding and liquidity challenges.

The year 2022, as we know now, is expected to be fraught with volatilities and risks as the Fed confronts the potential threat of a policy misstep and runaway inflation in the US. Rates are generally expected to rise and they have already reacted in that direction recently. The benchmark UST10y is now hovering around 1.7-1.8% level, a level dated back to Dec 2019 just before the COVID-19 pandemic outbreak. Given the huge swings and volatilities in UST rates and corporate credit spreads in 2021, we’re thankful and pleased that the fund didn’t suffer much of the carnage and delivered a par return for the year.

While the global business and economic backdrop in 2022 will remain uncertain, we are confident that the financial health of the major financial institutions as well as large, established corporations will remain stable as their management deals with the economic challenges in stride. We know well the corporate credit sector remains an important foundation that underpins a healthy macro condition as it dictates the income direction of jobs, employment as well as business spending. Judging from the trend in corporate profits, leverage profile, business confidence, and financial conditions, we expect to see ongoing recovery in the corporate business sector supporting quality credit investments.

Having said that, the global credit story will remain uneven across geographies, businesses, and industry sectors. While large established businesses will be supported by the capital markets to steer through the near and mid-term, small enterprise businesses on the other hand will continue to struggle. Hence, we will continue to exercise highly selective in our security picks, invest in quality credits, and avoid taking overarching credit risks in 2022.

To this end, we look forward to the world’s return to normalcy soon and wish everyone a safe, healthy & successful New Year!

Dec 2021