As credit spreads continue to tighten from March, holdings in Chinese state-owned enterprises (SoEs) have been amongst the most resilient holdings so far this year.
A good example could be Sinopec Group 3.25% 2025s, which have gained around 6 points so far this year, and roughly 9 points from March lows; the bond is currently floating close to all-time highs, set last Friday. Officially named China Petroleum & Chemical Corporation, Sinopec is the world's largest oil refining, gas and petrochemical conglomerate. Rated A1/A+, the bonds are not hugely attractive in terms of risk-adjusted returns and have just under two notches of credit cushion, however, in times of stress these bonds have supported downside performance. If we look at the longer-end of the curve the Sinopec 4.25% 2043 bond offers attractive returns and yield of 16.25% and over 2.5 notches of protection. Since we added this position in mid-January, it has tightened 77bps to a yield of 2.58%.
Another SOE we have favoured during times of market volatility is China National Offshore Oil Corporation, or CNOOC Group; one of the largest state-owned oil companies in China. The A1/A+ rated bond offers an expected yield and return of 5.56% and ~2.3 notches of protection.
One of the main reasons why we favour such bonds is due to the likelihood of extraordinary support from the Chinese government if required, and importantly the ability of the government to lend support; something we can no longer take for granted in the current virus-induced climate.