Converging on divergence in 2012 - The Asset

More documents

Recommendations

Info

It is going to be challenging for the Asian credit marketsto have a sustained medium to long term rally in 2012be a buyer on anything that resemblesa decent spread. This is like déjà vu –remember late 2010 to early 2011? –although you didn’t have an EU sovereigndebt crisis at that time. As an assetclass, credit markets in general will takea liking from investors with benchmarkrates staying low. But with the Europeanproblems not going away soon,coupled with a questionable recovery inthe US and reservations on Asia’s resiliency,it will be a trading market, withenough volatility to keep us on our toes.Returns will greatly hinge on markettiming and stock picking, which won’tbe easy, in light of the risks mentioned.Jay ParshottamContinued volatility2011 highlighted thefact that the Asianmarkets depend largelyon G3 economiesand returns in bondand equity markets underperformedthat ofthe US significantly, even though mostof the global concerns began from Europeand the US. I think 2012 is a yearof low rates and continued volatilityof Asian credit markets. In addition tothe uncertainty in G3, the Asian bondmarkets have several concerns of theirown: factors such as the outlook for theChinese economy; the state of its propertymarket; the onshore lending by itsbanks; and corporate governance. Aftersuch a weak performance in India in2011, many investors will be cautious togo back in until there is a clear directionon the domestic economy and stabilityin the currency. Lastly, the outlook forKorea with the new leadership in NorthKorea is also to be determined.In view of these factors, it is goingto be challenging for the Asian creditmarkets to have a sustained mediumto long term rally during 2012. Giventhe low level of borrowing rates in theUS dollar market, the external marketis going to remain attractive for issuersto raise money versus the domesticmarket, so supply will continue to hitTradersRank Name and Bank1 Dean Wang, Morgan Stanley b2 Kevin Aepli, UBS3 Archie Sy, Royal Bank of Scotland4 Jay Parshottam, Citi5 Nicolas Lee, Standard Chartered Bank b6 Richard Cohen, Credit Suisse7 Pracheesh Mishra, Citi8 Frederic Mahoue, BoAML9 Anthony Ngai, J.P. Morgan10 Sandeep Aggarwal, Nomurathe market, especially in the investmentgrade sector. I have a negative outlookfor Asian credit in 2012 relative to otherregions like Latin America.Nicolas LeeDynamic trading androtationsI am cautiously constructiveabout theAsian credit marketthis year for severalreasons. First, withthe market expectingabout US$60 billion in new issues,the supply-demand dynamic remainsfavourable with a low value of US$38billion worth of bonds redeeming. Especiallysince we expect inflows into theAsian credit market to remain positive,albeit not as robust as the last threeyears. Second, market participants aregenerally bearish and defensively positioned,which adds to the positive underlyingtechnicals. Third, a lot of therisk has been well flagged, which meansthe potential for a sudden surge involatility has diminished. Having saidthat, there are still a good number ofoverhangs. Doing well this year wouldrequire dynamic trading and rotations– and you would need to stay nimble.Pracheesh MishraPositive total returnsOur base case for 2012 envisages positivetotal returns for Asian credit witha trajectory involving a weak first halffollowed by a rallyinto the year-end asmultiple tail risksfrom Europe andChina get alleviated.Volatility will remainelevated as high cashlevels, light dealerbalance sheets andfickle/trading-oriented investor sentimentcontinues to magnify macro marketmoves.Additionally, total return based investorswill continue to find the Asiancredit market attractive, especially inHY, due to the twin attractions of double-digityields and low realized defaultrates. It is important to note that alternativescenarios for 2012 (all with negativecredit ramifications) have a muchhigher probability as compared to otheryears and those will result in potentiallymuch lower and possibly negative totalreturns.Sandeep Aggarwal2012 returns fromcouponsA lot of major risksmay crop up in 2012.Apart from the recessionand tail risksin Europe, there arerisks of a soft patch inthe US and major slowdown in China.There will be geopolitical issues in theMiddle East and North Korea that willcome into play.As such, I expect credit marketsto remain volatile. It is important tobear in mind that current wide creditspreads do incorporate these risks to afair degree. For example, high-yieldingChinese property bonds at yields of12% to 25% do price in major slowdownin China’s property sector. So,while we are starting this year withmuch wider spreads, the market has tograpple with a lot of macro risks. Onbalance, the wide credit spreads arelikely to persist alongside high volatility;with most of the returns for 2012coming from coupons.No unauthorized reproduction by any means.All rights reserved. Asset Publishing and Research LimitedFebruary 2012 41
By the second half of 2012, it will be easier to take directional risk in credit aswe would have more clarity on China’s growth outlook and the Eurozone crisisSALESPEOPLEEvelyn WongMarket likely tooutperform Europe andthe USI have adopted acautious outlook towardsthe Asian G3bond market in 2012.Having said that, themarket is still likely to outperform theEuropean or US G3 bond markets onthe expectation of deleveraging by Europeanbanks, more risk-conscious investorsand mounting new Asian corporateor bank issuers.Tiong Su MingMacro events driveperformance2012 will be the yearin which numerousmacro events drivethe performance ofAsian credit markets,rather than fundamentals.These events include the Eurozonecrisis, a soft or hard landingin China, the China property bubbleburst, US growth and elections, and theMiddle East tension and oil prices. Thisis why, despite knowing that certainspreads are wide to fundamentals andactual default risk, it is still hard to feeloptimistic on credit spreads going intothe first half of 2012.The two main developments thatclients are focussed on are the Eurozoneand China. In both, things are likely toget worse before getting better, so creditspreads have the potential to go muchwider following macro risk headlines.The Middle East tension can be a wildcard too, as investors overlook that risk.By the second half of 2012, however, itwill be easier to take directional risk incredit as we would have more clarity onChina’s growth outlook (assuming a softlanding as a base case) and the Eurozonecrisis would start to ease (assuming nobreakup of the Eurozone).In terms of the new issue pipeline,SalespeopleRank Name and Bank1 Evelyn Wong, Standard Chartered Bank2 Tiong Su Ming, Citi3 Barry Tan, Standard Chartered Bank b4 Stephen Mak, Barclays Capital b5 Angela Chan, UBS6 Jamie Fernando, Royal Bank of Scotland7 Chong Hui Chin, BoAML8 Una Lee, HSBC9 Leonora Lok, Citi10 Danny Lee, Royal Bank of Scotland= Anthony Neo, Citiwe expect much more supply from HG(especially in banks refinancing andGreater China corporates) as comparedto HY. With the deleveraging of Europeanbanks, corporates will have to turnmore to capital markets rather than thesyndicated loans market for funds.Barry TanGreater support forriskier assetsMacro headlines willcontinue to dominatethe bond marketsin 2012 and driveprices. It will be atale of two halves.In the first half of 2012, the unresolvedEuropean sovereign debt crisis, the developedmarkets growth story and thepotential of a Chinese hard landing willtake centre stage. This will likely lead toa flight to quality. Safe haven assets likeUS Treasuries and HG sovereigns andcorporates will therefore continue to bewell bid.That said, some of the bad news hasalready been priced in and any downsidewill be supported by fund flows awayfrom equities and into the bond markets,which will in turn prevent a massive selloff. Assuming quantitative easing in theUS and Europe later in the year, theglobal macro picture should improveand therefore enable greater support forriskier assets, particularly emerging marketand HY credits.Angela ChanFundamentals strongfor AsiaThe expectation ofthe EU entering intorecession this yeardoes not help marketsentiment. Yet,growth in other partsof the world is stable and flourishingin selected emerging market countries.The fundamentals are strong for Asia inview of slower but solid growth. Valuation,however, is still rich and technicalsremain supportive. Strong support inthe Asian primaries in the beginning ofthe year has shed some light in terms offund flows and sentiment. But consideringthat pent-up supply has been on thesidelines since last autumn, there is achance of some initial indigestion.Chong Hui ChinRipe conditions for creditspreads to narrowIt is hard to feel optimisticabout risky assetsin 2012, when investorsare confrontedwith the same issuesof sluggish economies,deleveraging balance sheets and fragileconfidence. Yet global markets shrug offS&P’s downgrade of nine Eurozone countries,S&P 500 posts the best start in 25years and US dollar credit issuances arecoming in strong. Are we surprised? Perhapsnot. Bond yields today are alreadypricing in a recession and investors aremore cashed up than before. Coupled withlight inventories on dealers’ books, conditionsare ripe for credit spreads to narrow.Still, investors will remain cognizantof volatility stemming from the Eurozonesovereign crisis. Most are painfully awarethat a relatively limited set of options isavailable to global policy makers and thatslowing growth raises the risk of policymissteps. Assuming discussions about theGreek debt crisis come to a head in thenext few months, and macro data improve,we could see a return in risk appetite, helpingspreads to tighten.42 February 2012No unauthorized reproduction by any means.All rights reserved. Asset Publishing and Research Limited
Page 1 and 2: Significant room for upside despite
Page 3: Regulatory considerations and the r

Converging on divergence in 2012 - The Asset

Create successful ePaper yourself

Delete template?

Save as template?