Taiwan’s Shin Kong Life is moving to overweight dollar-denominated emerging-market government bonds and foreign corporate credit by pouring $1.1 billion into such instruments in the fourth quarter.

This reflects a trend among Taiwanese insurance firms – such as Cathay Life and Taiwan Life – to continue buying overseas bonds despite heavy outflows globally from fixed income and emerging-market assets.

Investors are fleeing bonds, particularly in the US, in the belief that president-elect Donald Trump’s planned tax cuts and stimulus measures will trigger a rise in inflation and benefit other asset classes, such as equities. 

Moreover, the US Federal Reserve is expected to raise interest rates as early as next month, which is expected to negatively affect bond prices and emerging-market assets. The prospect of increased American trade protectionism is also worrying EM investors.

Bonds globally lost $1.29 trillion in value last week alone, according to Bank of America.

However, Shin Kong Life, which has NT$2.1 trillion ($66 billion) under management, is looking to secure higher recurring interest yield rather than capital gains from its debt portfolio.

The insurer will continue to buy dollar-denominated international bonds listed in Taiwan and underweight renminbi bonds as it expects the Chinese currency to weaken further, said Shin Kong Life senior vice president Sunny Hsu during Shin Kong Financial’s third-quarter analyst conference call today (November 17).

The firm has almost halved its overall exposure to RMB bonds issued in Taiwan and dim sum bonds to NT$70 billion from the NT$120 billion at the start of the year.

As of September 30, the firm had 41.7% of its AUM in foreign bonds, and EM sovereign debt accounted for 15% (about $4 billion) of the overseas bond portfolio.

Shin Kong Life vice president Lin Han-wei had in fact said in May that the firm would not overweight EM debt. During the same analyst call in May, the firm also indicated its plans to cut RMB bond exposure but continue to buy foreign debt overall.

Asked whether the firm was worried about the expected drop in bond prices, Hsu said about 90% of Shin Kong Life’s foreign debt positions were held to maturity, so a fall in bond prices would have little impact.

Emerging-market preferences

With regard to EM government bonds, Shin Kong Life favours countries with high interest rates and sovereign ratings. Hence it has put NT$40 billion into Mexico government bonds this year and bought Saudi Arabia government bonds in the fourth quarter to diversify the portfolio.

Mexico's benchmark interest rate is 4.75% and its sovereign rating is A3 from Moody's and BBB+ from Fitch and S&P, according to Trading Economics. Saudi Arabia's benchmark interest rate 2% and its sovereign rating is A1 (Moody's), AA- (Fitch) and A- (S&P)

Shin Kong prefers EM government bonds to US Treasuries because of the former’s higher yields, Stan Lee, senior vice president of Shin Kong Financial Holding said. Even though the US 10-year Treasury yield has risen by 50 basis points this month to 2.2%, that’s still not sufficient to cover the firm’s liability cost, which would be about 4.4% at the year-end, Lee said.

Mexican 10-year government bond yields stood at about 7% on November 17, according to investing.com. Meanwhile, Saudi Arabia made its first international bond sale since 2007 in October, raising $17.5 billion, according to Reuters. A $5.5 billion five-year tranche was launched at 135bp over US Treasuries, a $5.5 billion 10-year tranche at 165bp over, and a $6.5 billion 30-year tranche at 210bp over. 

Of course, EM government debt yields are high because it faces significant risk. Moritz Kraemer, global chief rating officer for sovereign ratings at Standard & Poor’s, said: “Nine of the 20 top emerging-market sovereigns – those with the largest absolute amount of sovereign debt outstanding – have negative outlooks, indicating a possible downgrade over the next two years, against just two positive outlooks.”

Quizzed about EM debt risk, Lee said Shin Kong Life was not buying EM bonds for trading purposes, so its main area of focus was government default risk.

The currency is less of a concern, as the insurer only buys dollar issues, he noted. For example, while Mexico faces political risk from Trump’s attitude towards the country, this would mostly affect the peso, said Lee.

Mexico and Saudi Arabia together account for about 20% of Shin Kong Life’s overseas debt portfolio. The rest is in North America (about one-third), Europe (30%) and Asia Pacific (15%).

Credit appetite

As of September 30, Shin Kong Life had 53.8% of its foreign fixed-income portfolio in corporate credit. It will buy more corporate bonds globally, mainly those issued by financial firms and in stable industries such as energy, telecoms and utilities, Lee said.

Shin Kong Life will also continue raising allocations to dollar-denominated international bonds listed in Taiwan, from NT$318 billion on September 30 to NT$350 billion at the year-end, Hsu noted.

Generally, interest rate rises in the US will be positive for Shin Kong Life as they will boost bond returns while the cost of servicing liabilities remains low in Taiwan, Lee said, reflecting the view of other Taiwanese insurers. Shin Kong Life’s asset duration is about 11 years, and its liability duration about 20 years.

Meanwhile, the insurer is looking to boost exposure to stocks with high dividends and good earnings growth, Hsu said, both in Taiwan and globally to improve recurring yields.

As of September 30, on top of its 41.7% allocation to foreign bonds, Shin Kong Life had 14.9% in international bonds listed in Taiwan, 12% in domestic bonds, 6.8% in domestic equities, 6.6% in real estate, 6.2% in cash, 5.2% in policy loans, 3.7% in mortgage and corporate loans, and 2.9% in foreign equities.