A recent DMSA study analyzing the top ten Asia-focused pension and mutual funds with the largest exposure to Evergrande bonds shows:
Evergrande and general China exposure has led to losses of up to 21 percent this year in all 10 funds studied; across all 10 funds combined, losses total $7 billion. Current Evergrande bond prices are about a quarter per dollar (about 25 percent of 100 nominal) and, based on Fitch redemption rates, will fall to 5 percent per $100 upon insolvency. Therefore, a further correction of 6 percent or $2 billion is expected.
"If Evergrande will be bankrupt, the above funds would lose $9 billion in total year-to-date. This does not take into account real estate companies that are still well valued and which could also be on the verge of insolvency. The funds' losses then exceed the $10 billion mark," explains DMSA senior analyst Dr. Marco Metzler. It also shows that with only $1.2 billion of reported official Evergrande bond exposure, the losses are significantly higher than the nominal bond exposure by a factor of 10. "The difference can only be explained by possible additional investments in other bonds from Chinese real estate developers and credit default swaps (CDS)," analyzes Dr. Metzler. According to a research report by investment bank Goldman Sachs, the market's CDS exposure to Evergrande is said to be around $158 billion. "This shows that extent of the spill-over effects of the Evergrande bankruptcy. In addition to the $23.7 billion in bonds, another $158 billion would then be lost," Dr. Metzler summarized.
Valued at $55 trillion, the Chinese real estate market is twice the size of that in the United States. It generates 29 percent of China's gross domestic product, compared with 10 to 20 percent in other nations, and has been called the most important sector of the global economy. But with the mountain of debt from real estate developers like Evergrande and funds overweight in real estate bonds, many are now experiencing dramatic losses.
According to the information available, the Asian High Yield funds of Fidelity and UBS are the ones with the highest Evergrande exposure.NameParticipationIssued pcs.in %DatadeliveryFantasiaParticipationDatadelivery FantasiaFIDELITY - ASIAN HIGH YIELD215.056.3050,9130.06.2021-30.09.2021UBS - Asian High Yield USD171.924.0000,7330.09.202153.050.00030.09.2021Ashmore SICAV - Emerging Markets TR166.656.0000,7030.09.202128.208.00030.09.2021Ashmore SICAV - Emerging Markets LC140.016.0000,5030.09.202147.841.00030.09.2021iShares USD Asia High Yield Bond ETF134.439.0000,5008.11.20212.300.00008.11.2021PIMCO Asia High Yield Bond Fund111.300.0000,4730.06.202117.400.00030.06.2021BlackRock - Asian Tiger Bond88.589.0000,3731.05.202138.535.00031.05.2021Fidelity - Global Multi Asset Income76.007.6400,3231.08.2021-30.09.2021Eastspring Investments - Asian Bond58.950.0000,2530.09.202148.450.00030.09.2021AB FCP I - Global High Yield Portfolio28.460.0000,1230.09.2021-30.09.20211.191.397.945235.784.000Participation on Evergrande and Fantasia Bonds
Looking at the average ratings in the affected funds, the Fidelity Asian High Yield Fund has a weight of 34.2 percent invested in real estate with an average rating of BB. This has lost 17.3 percent in value this year. The UBS Asian High Yield Fund, with an average rating of BB-, holds 45.7 percent in real estate bonds. This has lost 20.8 percent in value this year.
"The top ten funds hold $1.2 billion in Evergrande bonds," said Dr. Marco Metzler. "However, there is another $236 million exposure to other real estate companies such as Fantasia, and it is quite clear that the funds under consideration are overweight the real estate sector. They hold up to 45 percent in real estate bonds, which may now be their undoing."NameLossesIn % 2021Participation Evergrande BondsAuM in Bio. $Losses in Bio. $FIDELITY FUNDS - ASIAN HIGH YIELD FUND-17,27%215.056.3053,90-0.79UBS Lux Bond SICAV - Asian High Yield-20,83%171.924.0002,97-0.75Ashmore SICAV - Emerging Markets TR-11,24%166.656.00021,35-2.67Ashmore SICAV - Emerging Markets LC-11,18%140.016.0003,33-0.41IShares USD Asia High Yield Bond Index-15,50%134.439.0001,74-0.31PIMCO Asia High Yield Bond Fund-12,83%111.300.0001,73-0.25BlackRock Global Funds- Asian Tiger Bond-8,27%88.589.0005,25-0.47Fidelity Funds - Global Multi Asset Income-3,93%76.007.6409,30-0.38Eastspring Investments - Asian Bond-8,25%58.950.0003,60-0.32AB FCP I - Global High Yield Portfolio-2,36%28.460.00027,05-0.651.191.397.945-7.01Losses of funds with largest Evergrande bond exposure
The losses incurred have already called for personnel consequences. The senior investment manager of UBS Asian High Yield has reportedly left the firm after suffering significant losses since the start of the year and holding substantial holdings in the Chinese real estate sector, including bonds issued by Evergrande. Singapore-based Ross Dilkes has left UBS Asset Management after starting there 16 years ago, according to a "Bloomberg" report. Dilkes is the senior manager of the Asian High Yield fund, which was launched about nine years ago.
Treasury Secretary and ex-FED President Janet Yellen fears consequences for the global economy. She recently warned that Evergrande's and other Chinese difficulties in repaying billions of dollars in loans could have repercussions for the global economy.
Fears that its collapse could drag down Chinese banks and shake the country's huge real estate market have roiled global financial markets and now Americans.
The Federal Reserve warned of direct risks to the U.S. in its latest Financial Stability Report. Financial tensions in China could weigh on global financial markets by worsening risk sentiment, pose risks to global economic growth, and affect the United States.
Please find more information and the research report at www.dmsa-agentur.de.
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