Asia Credit Bond Fund

Capital at risk. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

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Overview

Manager's Outlook

We expect market returns to improve in the year ahead as the relative resilience of Asia Credit leads us to believe it could lead the recovery. Valuations are attractive, with decade-high index yields, and well above the long-term average. Volatility is likely to persist, and levels may cheapen further; but we should be approaching attractive entry points to gain exposure to an asset class that has demonstrated strong historical risk-adjusted returns and diversification properties.

We view Asia credit bonds as an asset class with sound long-term prospects predicated on strong regional economic growth. These bonds have an important part to play in fixed income portfolios, offering good diversification benefits as well as attractive risk-adjusted return profiles, access to strong economic growth potential, and the higher quality segment within EM fixed income. Despite challenging markets in recent months, these remain structural features of the asset class

China's weight in the JACI Diversified benchmark and in the Asia credit opportunity set are declining. We expect the market will skew towards more ex-China opportunities going forward. The record Asia issuance volumes in 2021 was driven by growth in non-China issuance which compensated for the drop in China issuance.

The property sector is a meaningful part of the China credit opportunity set, particularly the high yield segment. We expect to see some further volatility in the short term, followed by a longer period of consolidation. Our expectation is that China's property development sector will switch to a more utilitarian model, dominated more by state-owned developers, with private sector companies playing a smaller role. In the longer term, investors should welcome a healthier sector backdrop, with stronger balance sheets for those companies that survive the consolidation process.

The direction of U.S./Developed Market and Chinese monetary policy will continue to be the key drivers influencing Asian credit markets in 2022. The divergence in policy stance will be a supportive factor for Asian and Chinese credit, whereby buying opportunities may emerge in the months to come. Chinese regulators have demonstrated looser policy stance with a number of easing measures over recent months. Policymakers have enabled a cut in end borrowing rates reflected in lower loan prime rates, falling loan yields and lower deposit rates. They seek to implement easing measures to selective parts of the economy.

We expect there to be more of the same looking ahead, as we head toward the key 20th Party Congress later in the year.

The rest of the Asia credit asset class should remain resilient. Corporate fundamentals and credit metrics are generally healthy, but likely at peak levels as supply shortages and rising input prices are pressuring margins in places. We see value in the new issue market where an issuance drought due to investor concerns led to in concessions and more attractive prospects. The truncated supply in the new issue high yield market should benefit secondary prices when sentiment improves.

We believe a bottom-up, fundamental-driven approach can help to identify issuers with strong credit stories that will lead growth in the region. Integrating macro and ESG viewpoints in the investment process may also help us to select names that are likely to emerge stronger from the cycle. As the higher-quality segment of the Emerging Market fixed income universe, we continue to expect that Asia Credit will be able to deliver attractive risk-adjusted returns in the long-term.

Strategy

Fund Summary

Our approach is based on proprietary fundamental credit research and relative value analysis. The investment process places a strong emphasis on risk management practices and portfolio diversification to manage the overall risk profile. We seek to exploit market inefficiencies and identify unique and underfollowed credit ideas. The promotion of environmental and/or social characteristics is achieved through the fund's commitment to maintain at least 10% of the value of its portfolio invested in Sustainable Investments, as defined by the SFDR. Additionally, we apply a proprietary responsible screen (exclusion list). The manager is not constrained by the fund’s benchmark, which is used for performance comparison purposes only.

Performance - Net of Fees

Past performance is not a reliable indicator of future performance.

30-Jun-2022 - Sheldon Chan, Portfolio Manager,

We have pared risk and are more measured in our exposure, recognizing the reality that high yield is more dislocated. Prudent sizing in China's high yield bonds has helped in the de-risking process, which has also meant a reduction in our weightage in China.

We continue to look for evidence of transmission from China easing monetary, regulatory, and/or COVID policy, but progress has been gradual so far and consensus China growth estimates continue to trend down.

Portfolio positioning in China reflects some of these themes with our China high yield positions sized prudently to account for wider tails. We remained underweight in China investment-grade given geopolitical tensions that may ebb and flow but will persist over the long-term.

Structurally, the portfolio is overweight in the BB rated category. We capitalized on some de-risking opportunities to rotate into South Korean investment grade bonds from long duration bonds from Philippines, Middle East, and India without sacrificing yields.

The main overweight positions in the portfolio were in India, Indonesia, and Thailand, which were funded by underweight positions in South Korea investment grade, China/Hong Kong investment grade, and in Malaysian credits. Overall, we moved to a neutral position in China and in the Chinese property sector.

Reduced overweight in China moving to neutral

We continue to feel China property has remained under pressure and the situation remains fluid. While a pivot in regulatory policy was the basis of our investment thesis, it has so far been insufficient to ease investor concerns about near-term liquidity pressures. We selectively reduced position sizes in the Chinese HY property sector to reflect our outlook of near-term challenges.

Added to India exposure

We bought bonds in the Indian renewable energy sector after the sell-off in May resulted in tactical opportunities. The portfolio added bonds from solar power operator Adani Renewable and renewable power producer Azure Power after a conviction change during the quarter following relative valuation changes.

Increased our South Korea investments

The portfolio raised its exposure to South Korea, acquiring new positions in state-owned Korea National Oil, which is mainly engaged in the exploration and development of oil and gas fields and buying more bonds in Kookmin Bank. We think the Korean investment grade segment offers a better volatility profile and entails lower tail risk. It is also attractive because new bond supply has remained consistent over the years even as the rest of the market virtually shut down. We used the new issue concession to add to our positions and reduced structural underweights.

Reduction in our Philippines weightage

We trimmed our Philippines exposure selling some of the corporate bonds from the Southeast Asian country. We exited long duration positions in names like ICTSI, port operator and container terminal operator, and Globe Telecom, one of the major telcos in The Philippines, due to valuation reasons.

Addition to Sri Lanka exposure

We added to our position in distressed Sri Lanka bonds ahead of restructuring to take advantage of potentially higher recovery values than what is currently priced in the market. As the country's restructuring talks with the International Monetary Fund (IMF) progresses, it has aligned its policies accordingly reverting to less populist measure, such as raising taxes and we will wait for that to play out. We are coordinating with other bondholders and the distressed debt advisers as the restructuring process plays out.

Past performance is not a reliable indicator of future performance.

The Funds are sub-funds of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which is registered with Commission de Surveillance du Secteur Financier and which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). Full details of the objectives, investment policies and risks are located in the prospectus which is available with the key investor information documents and/or key information document (KID) in English and in an official language of the jurisdictions in which the Funds are registered for public sale, together with the articles of incorporation and the annual and semi-annual reports (together “Fund Documents”). Any decision to invest should be made on the basis of the Fund Documents which are available free of charge from the local representative, local information/paying agent or from authorised distributors. They can also be found along with a summary of investor rights in English at www.troweprice.com. The Management Company reserves the right to terminate marketing arrangements.

Hedged share classes (denoted by 'h') utilise investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be borne by the share class and there is no guarantee that such hedging will be effective.

Before deciding to invest in the fund, you should read the offering document/prospectus (including its investment objectives, policies and any risk warnings) which are available and may be obtained from any appointed distributors.

The specific securities identified and described in this website do not represent all of the securities purchased, sold, or recommended for the sub-fund and no assumptions should be made that the securities identified and discussed were or will be profitable.

A full list of the currently issued Share Classes including Distributing, Hedged, and Accumulating Categories may be obtained, free of charge and upon request, from the registered office of the Company.

Benchmark: Investors may use the benchmark to compare the fund’s performance. The benchmark has been selected because it is similar to the investment universe used by the investment manager and therefore acts as an appropriate comparator. The investment manager is not constrained by any country, sector and/or individual security weightings relative to the benchmark and has complete freedom to invest in securities that do not form part of the benchmark.

Disclosure on Vendor Indices can be found here.

Reduced overweight in China moving to neutral

Added to India exposure

Increased our South Korea investments

Reduction in our Philippines weightage

Addition to Sri Lanka exposure

Risks

Typical Investor