APAC Credit Markets Strategy & Outlook

22 April 2016

APAC Credit Markets Strategy & Outlook

           

HIGHLIGHTS

¨      Asian credits left 1Q16 unscathed, CDS eased. This was thanks to expectations of renewed stimulus by global central banks as the Fed trimmed four potential rate hikes to two. Furthermore, the ECB implemented a broader  securities repurchase programme and maintains a dovish tone despite negative bond yields, while BoJ formally implements a negative rate regime. In the EM, PBoC’s ongoing piecemeal stimulus and measures to curb outflows has also boosted sentiment in Asia. The mild recovery in commodities during the quarter supported risk assets, as can be seen by the Asia iTraxx CDS which eased from >175bps in February to the around 1455bps currently.

¨      Overall index gained from favourable macro support factors (Figure 1.1) but IG spreads benefitted more than HY. Investment-Grade (IG) spreads widened by only  5bps to +219.5bps during the quarter despite the sharp decline in 5-year Treasury by 55bps to 1.21% from 1.76% in December, i.e. a 50bps spread compression. Meanwhile, HY narrowed 34bps, underperforming IG on a spread perspective.

¨      Strong rally was technical and liquidity-driven, hence we are more cautious. We strongly believe that Asian credits would post another year of positive returns in 2016 on a combination of sustained demand from investors, good fundamentals and low default rates. The 1Q16 scare appears to have retreated, following the recovery in risk appetite amid higher commodities prices since early April.

¨      Supply of USD bonds in Asia ex-Japan (AxJ) dropped in 1Q16 by 31% to USD41.4bn, the slowest 1Q since 2011. This was largely driven by fewer deals from Chinese credits, which fell to USD11.6bn from USD16.4bn last year, and a sharp decline of 80% in HY offerings of only USD1.26bn which is the lowest since 4Q11.

¨      Weaknesses seen across sectors. The sluggish economic outlook and weaker sovereign profiles led to negative rating actions on most credits; although the commodities sector downgrade was intuitive, even the perceived strongest banks in Singapore and consumer sectors across APAC (traditionally defensive) were placed under negative outlook.

¨      Strategy: i) reiterate IG and low-beta credit preference to manage volatility; ii) selective quality HY for yield pick-up; iii) upgrade duration to neutral from mild underweight; and iii) sector-wise, no clear winners from top-down but banks subdebt, SOEs and landlords/REITs could offer alpha given their defensive nature and decent yields. Geographically, Singapore, Hong Kong and Korea could be the better choices within IG, while Indonesia and India are the usual picks within the low-IG (or cross-overs) space in view of an improving macroeconomic story. We are Neutral on the rest, i.e credits from Malaysia, Thailand and China due to lack of fundamental catalysts.