By Allan Lane, Algo-Chain – It has been over 14 years since Thomas L Friedman wrote his best seller, ‘The World is Flat’, and what better time to review his basic thesis than during the 2019 ‘Summer of Hate’.
If Friedman suggested the world offers a level playing field, it doesn’t seem like that from my bunker where there are strict rules on the number of political diatribes, disguised as news, that I am willing to let seep into my inbox.
No sooner had BlackRock issued their press release about the launch of the iShares China Bond ETF, when a Donald Trump Twitter tantrum wiped 7 per cent off the fund’s value as the Chinese authorities loosened the peg on their currency the Renminbi.
We’ve had the war on investment fees, as if that wasn’t enough for ETF providers to navigate. Before launching a new ‘Non-American’ investment fund, product development teams now need to anticipate as and when the next ‘tweet’ will strike before deciding on their launch date. I guess it adds new meaning to the notion that some people suffer more bad hair days than others.
On a more serious note, I have always been bullish on Emerging Markets Fixed Income ETFs, as indeed have many others judging by the large amount of assets that the iShares JP Morgan $ EM Bond ETF and the iShares JP Morgan EM Local Govt. Bond ETF have amassed, GBP8.3 billion and GBP7.7 billion respectively.
The stylised facts are easy to digest – view these EM Fixed Income index trackers as lower risk assets as compared to your typical equity product, but with an above average income stream. Of course, there is the issue of currency risk, which may be a disincentive for some investors.
The iShares China Bond ETF comes with a management fee of 0.35 per cent, comprising a portfolio of about 25 state issued CNY denominated sovereign bonds, with a duration of 7.2 years, currently yielding 3.2 per cent. As was highlighted in the press release by Vasiliki Pachatouridi, Head of iShares EMEA Fixed Income Strategy, there is much merit to the argument that this fund offers access to an asset class that is less correlated to the usual investment choices than most. With the tailwinds that came into view during last week’s trade war spat, I suspect many investment managers will be looking for every ounce of diversification that they can lay their hands on.
For the record it is only fair to mention that it was Xtrackers that was first to market with an ETF providing exposure to China Sovereign Bonds. This was listed some three years ago, but with only a handful of bonds in the portfolio as it only covers government bonds of medium-term maturity of between four and seven years.
With this recent listing by iShares, they have circumnavigated the low number of securities by including bonds issued by The Ministry of Finance and additionally those issued by Chinese policy banks such as The China Development Bank and The Agricultural Development Bank of China. It is too early to judge whether the issue of perceived credit risk might temper investors’ enthusiasm for this product. China’s credit bubble has been the topic of much discussion, but whether this could spill over into these policy banks is a question best asked of those with more specialist knowledge.
What is clear though is BlackRock’s intention to be a major player in the Chinese investment space. In many ways it has been very fortuitous that there were only USD25 million in assets under management when the Renminbi gapped down against the USD. Unwittingly Donald Trump’s tweet has provided an entry level for this ETF that in effect offers investors a one-off discount. The sales team at iShares most likely can’t believe their luck.
Trust me, this will not be the last China centric product that iShares will bring to market, the next ones however might be targeted at China’s domestic market. Notwithstanding a few bumps along the way, the investment case for Chinese fixed income assets suggests Friedman’s view that the world is flat seems back in vogue.