Converging on divergence in 2012 - The Asset

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How China manœuvres itself through the year willaffect how Asian credit markets perform in 2012ations and some stabilization in the marketshould argue for sector rotation intoAsian dollar bonds, which means highernet inflows. However, we will need togo through the initial period of volatility,though so far the market turns out tobe firmer than expected – which we willtake advantage of by finding better entrypoints for bonds we like.Harsh AgarwalConstructive on marketsin the near termAsian HY corporatebonds have made astrong start to theyear. Technicals remainstrong as of now,but the lack in HYsupply – unlike high-grade (HG) – hasmade most real money investors underweightin HY and hedge fund investorssitting on a lot of cash. This could changeif we see a major negative headline fromEurope, potentially from Greece. However,the consequent dip is likely to beshort and shallow and investors coulduse it as a buying opportunity. Our largernear-term concern is fresh supply in theHY space, as we think there is a lot ofpent-up demand from issuers with USdollar bond markets closed for aroundseven months. Apart from this, headlinescould come from a China and Indiasoft landing, disappointment with USgrowth, etc. So, while we are constructiveon markets in the immediate future,we suggest investors should gradually useit as a way to cut longs and wait for theirchances to get long again.Imtiaz ShefuddinMost of the attention onEurozone eventsLike 2011, 2012 willbe another challengingyear, more so asexternal events willhave a major influenceover the performanceof Asian credit markets. We expectmost of the attention to be on howevents in the Eurozone pan out. HowAnalystsRank Name and Bank1 Edwin Chan, UBS b2 Harsh Agarwal, Credit Suisse3 Imtiaz Shefuddin, Royal Bank of Scotland b4 Pradeep Mohinani, Nomura5 Vivien Gui, Morgan Stanley6 Dilip Shahani, HSBC7 Ray Heung, BNP Paribas b8 Annisa Lee, Nomura9 William Mak, Nomura10 Keith Chan, HSBCChina manœuvres itself through the yearand whether or not this comes with areasonably robust growth rate (hard orsoft landing) will be another major factorin how Asian credit markets perform in2012. Our current forecast is for Chinato record an 8.5% GDP growth rate in2012, although we remain conscious ofthe broader implications of several ‘whatifs’ and/or a larger than expected slowdown.Current credit spreads providefor significant spread contraction opportunitiesin the event of some favourableoutcomes. However, just as 2011has shown on a couple of occasions, theimportance of a disciplined approach towardsstock picking with a focus on bondstructures and covenants remains – if ithasn’t grown.Pradeep Mohinani,Annisa Lee,William MakPoorest liquidityconditions since 2008Since mid-2011, Asiancredit spreads havewidened by 80bp to100bp for HG andHY sovereigns and by 350bp for HY corporatebonds to current levels of 300bp,285bp and 940bp, respectively, and historicaldata suggests that a recession isclose to being priced in. On the otherhand, we need to consider that liquidityconditions are the poorest since 2008,with dealer inventory running at nearten-year lows.Also, we are certainlya long way frompricing in systemicrisks. Of course, wecould further complicatematters byfactoring in the riskof a China hard landing.But for starters,if Lehman’s collapseis any guide, HG corporatespreads wereas wide as 670bp,HY sovereigns 950bpand HY corporates2,700bp in the fourthquarter of 2008.Our recommendedtrading strategy heading into 2012 isaimed at protecting capital in HG, whilefocussing on generating sufficient returnsfrom the wider HY trading creditsthat are unlikely to be default candidates.Vivien GuiBetter return thanlast year2012 will be a bumpyride. However, itshould end up withbetter returns than2011 with the EUhaving a clearer wayout and China turning to looser policies.Dilip ShahaniShift to a defensive ornegative positionWe have shifted backto a defensive ornegative position towardsthe Asian credituniverse, from ourneutral position lastAugust. Putting this viewpoint into thecontext of credit performance, we see theHSBC Asian Dollar Bond Index (ADBI)and Asian HY Bond Corporate Index(AHBI-Corp) spreads revisiting the wideprints of around 440bp and 1,150bp,respectively, before the end of the firstquarter of 2012. We are calm about theUS Treasury yield direction and volatil-No unauthorized reproduction by any means.All rights reserved. Asset Publishing and Research LimitedFebruary 2012 39
Regulatory considerations and the race to meet Basel IIIrequirements will constrain banks’ balance sheetsity, with the Fed committed to holdingits policy rate steady until mid-2013.Equally important, the Fed continues tosignal a bias to further monetary easing,especially as the US still faces headwinds.In the corporate and sovereign space, weadopt a defensive stance in view of theweak outlook for the first quarter of 2012and recommend high-quality names.Besides the fundamental risks comingfrom Europe, we believe investorsneed to grasp the significance of thefront-loading of HG corporate and HYsovereign Asian new issuance in early2012. We are looking for gross total issuancein the range of US$65 to US$72billion in 2012, which is 96% to 106% ofthe 2011 level.Ray HeungTough year for investorsWe expect this year to be tough for investorsas a combination of macro andtechnical factors continue to linger. Onthe macro side, the European crisis isstill going to be themain focus. Again,Asian economies arelikely to performbetter but the Asiancredit universe willcontinue to ebb andflow with the globalfinancial market.Market makers in Asia are dominatedby non-Asian banks and with fundingcosts increasing, dealers’ inventory levelsand capacity to bid will be put to thetest. We expect a more volatile marketin 2012 overall.TRADERSDean WangSlower growth and lower ratesThe main theme of slower growth andlower rates remains. Risks from banks’deleveraging will persist. Similar to2011, this means continued volatilityand will require a constant reviewof trading strategies.Europe aside,regulatory considerationsand the raceto meet Basel III requirementswill constrainbanks’ balancesheets. This dragslevels of intermediaryactivities lower, thereby hurtingmarket liquidity. I see these factorsdampening risk appetite over time.However, cash needs a home eventually,and I think credit will remain thepreferred asset class.Archie SyResults hinge onmarket timingWith benchmark ratesnow being kept lowerfor longer and longer(again), it is easyto get sucked intothe carry game andSpread forecasts for Asian G3 bonds from the end of 2011 to the end of 2012 and expected total return for the yearHigh yield (bp)> +200+200+100 Viktor Hjort (+110)Evelyn Wong0 Sandeep AggarwalJohanna Chua (from -100 to 0)Ray Heung-100 Nicolas LeeJay ParshottamKaushik RudraArchie SyBarry TanTiong Su Ming-200 Edwin ChanKrishna HegdePracheesh MishraImtiaz Shefuddin< -200 Angela ChanVivien GuiDean WangInvestment grade (bp)> +50+50 Ray Heung+25 Vivien Gui0-25 Sandeep AggarwalJohanna ChuaViktor Hjort (-35)Pracheesh MishraKaushik RudraArchie SyBarry TanTiong Su MingEvelyn Wong-50 Angela ChanKrishna HegdeNicolas LeeDean Wang< -50 Edwin ChanJay ParshottamImtiaz ShefuddinTotal return (%)> 12.510-12.57.5-10 Angela ChanEdwin ChanPracheesh MishraImtiaz ShefuddinDean Wang5-7.5 Sandeep AggarwalVivien GuiKrishna HegdeNicolas Lee (< 6)Kaushik RudraBarry TanEvelyn Wong2.5-5 Johanna ChuaRay HeungArchie SyTiong Su Ming0-2.5 Jay Parshottam< 040 February 2012No unauthorized reproduction by any means.All rights reserved. Asset Publishing and Research Limited
Page 1: Significant room for upside despite
Page 5: By the second half of 2012, it will

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