Shin Kong Life will continue to rotate its government bond allocation from developed markets into emerging markets in search of higher yields, and is shying away from foreign stocks amid elevated global uncertainty.
Today AAA-rated, so-call risk-free debt does not provide enough yield and cannot be a core part of the portfolio, said Stan Lee, senior vice president of Shin Kong Financial Holding, the parent of the Taiwanese insurer. He also pointed to the upward trend in long-term interest rates.
For the second time in three months, on March 15 the US Federal Reserve raised its benchmark interest rate to 1% from 0.75%.
“Even before [the announcement], we were sure that the Fed would start the rate hike cycle. We predict three rate hikes to happen this year,” Lee said during the firm’s 2016 fourth-quarter results call on March 16.
“The higher the rate is, the better we can invest or re-invest our money into the market for higher yields,” he added. “It’s very encouraging; we've been waiting for that for years.”
As of end-2016, Shin Kong Life had NT$2.2 trillion ($72 billion) in investable assets. Foreign fixed income accounted for the largest portion, at 44.1%, followed by international bonds listed in Taiwan (15.5%) and domestic fixed income (11.2%) (see chart below).
EM debt increase
As of end-2016, Shin Kong Life had 70.8% of its NT$2.2 trillion ($72 billion) under management in fixed income; most of which (59.6% of total AUM) is in foreign debt, including international bonds listed in Taiwan.
Its allocation to government bonds leapt last year to 20.3% as of December 31, from 15.3% on September 30 and 12.7% at end-2015. It did not clarify how much of the increase went into EM bonds, but they are likely to have been the main driver of the increase.
Shin Kong Life said it was cutting exposure to AAA-rated, "risk-free" bonds, but did not say by how much. It said in November that it would overweight dollar EM sovereign debt and foreign corporate credit by pouring $1.1 billion into such investments in the fourth quarter of 2016.
“Most EM government bonds provide high yields and fixed duration; that's the rationale behind [these moves],” Lee said.
Shin Kong Life only invests in dollar-denominated, high-grade EM government bonds issued in countries that are rich in natural resources or have a strong alliance to the world's biggest economies, said Lee. Such nations include Indonesia, Mexico and Saudi Arabia, he added.
Though the insurer has pledged to increase its foreign credit exposure, that allocation has actually declined as a portion of its overseas bond portfolio, to 50% at end 2016 from 53.8% on September 30 and 57% at end-2015.
But the firm has not sold foreign credit, said Lee; the drop in allocation is down to the rise of exposure to international bonds such as EM government debt.
However, Shin Kong Life has continued to sell renminbi bonds. The firm’s overall exposure to RMB debt issued in Taiwan and dim-sum bonds fell to NT$51 billion as of end-2016, from NT$70 billion at end-September and NT$120 billion at the start of last year.
“We don’t have a solid reason now to enlarge the renminbi position or reduce it further,” Lee said. Shin Kong Life does not think the RMB will weaken further against the dollar, so will retain its current position, he noted.
“And without high enough yield or sufficient vehicles or contracts for us to hedge the currency against renminbi, there is no reason for us to increase the positions in dim-sum bond or [via] the Bond Connect.”
Bond Connect is a bond-trading link between China and Hong Kong that will go live this year, announced Chinese prime minister Li Keqiang on March 15.
On the equity side, Shin Kong Life had cut its foreign stock exposure to 2.5% of total AUM as of end-2016, from 2.9% at September 30 and 4.4% at end-2015. This is because there were quite a few events that created uncertainties last year, Lee said. “We are not bearish about the equity market, [we] just [want] to control the risk."
The November election of Donald Trump as US president has left investors wondering about the possible trajectory of American policy in certain key areas, including international trade and capital markets.
Meanwhile, Britain's vote in June to leave the European Union has has sparked concerns about the possibility of further populist-led outcomes and even the potential breakup of the EU. The failure of the Dutch far-right PVV party to win the general election yesterday will have soothed such fears, although the vote saw PVV advance from being the country's third biggest party to number two.
Meanwhile, Shin Kong Life increased its domestic equity exposure rose to 8.8% at end-2016, from 6.8% at September 30 and 8.1% at end 2015. The insurer plans to continue investing in domestic high-dividend stocks in 2017. It expects to receive at least NT$10 billion of cash dividend income from such investments this year.
The firm generated nearly NT$6.2 billion of cash dividend income from domestic equity investments last year, noted Lee.