Through 2020, we have seen all major global bond markets become both more correlated and more volatile. For Hayden, this increased correlation means that the diversification benefit from holding government bonds is starting to subside.

Hayden remarked that China fixed income remains a stand-out market, offering higher yields, lower correlation and lower volatility compared to major global bond markets. 

That creates a challenge for investment strategy.

Typically, allocators taking a barbell approach would have government bonds on one side offsetting the risks of credit on the other.

With the limited diversification from typical global markets, as well as increased volatility, Hayden argued that investors need to rethink their portfolio, and China fixed income has an excellent case from diversification, yield and capital appreciation perspectives, particularly with further rate cuts expected in China over the next 12 months.

Countries on the right side of the line in the below graph are experiencing deep recessions, which will take many years to recover, potentially raising default risk.

Looking further from a valuation perspective, China credit, and particularly high yield, are a standout globally with higher valuations compared to the US and Europe. China high yield also has low exposure to commodity risk, particularly compared to the US, which Hayden believes lessens default risks.

From a sector point of view, real estate remains a dominant part of the China high yield space.

According to Hayden, the long-term picture is strong, since China is only approximately 60%^{^} urbanized, implying continued demand in the future.

More specifically, Hayden pointed out that recent sales in the sector have been strong, and he remains positive, as well as selective, in the market, with a particular focus on the larger, higher quality names in the sector.

^{^}Source: Statista, 2020