Dilip Shahani, head of Asia credit research
HSBC
We expect the current ‘risk-on’ phase to continue, albeit in an erratic manner until year-end. Explicitly, we recommend the ‘B’-rated Chinese property issuers because of good earnings momentum, large spread cushion and limited supply. Otherwise, split rated longer dated Indonesia quasi-sovereign issuers which still offer value after the recent price and spread corrections.
Investors need to redeploy abnormally high cash levels to enhance performance given cash buffers were earlier built up on fears of interest rate volatility following the September Federal Open Markets Committee meeting. But the difficult US political negotiations over public sector finances weighing on businesses and households’ future purchases have the US Federal Reserve delaying any monetary decision until it determines the fiscal agreement’s impact on the economy.
From a timing perspective, post the December 17-18 meeting seems doubtful with the continuing resolution providing funding for discretionary government programmes through January 15, 2014. So, US politicians face little immediate pressure to come up with a solution for financing the budget for financial year 2014 (which started in October) by the proposed deadline of December 13. This means the Fed adjusting monetary policy could be postponed until after the January 28-29 meeting.
At the same time, however, we expect credit spread compression to be limited by substantial primary issuance in coming weeks. This reflects issuers desire to lock in low financing costs with the US rate environment unclear from early 2014 onward. There are also concerns about the Asian economies in 2014. In particular, China’s sustainable growth rate is in focus, given lingering concerns that growth momentum might soften in first half of 2014 without additional fiscal stimulus, especially if the country’s authorities fail to deliver quickly on structural reforms following the key November Politburo meeting.
Viktor Hjort, managing director, Asia credit strategist
Morgan Stanley
No. Asian credit markets are facing a fundamental environment that for many corporate borrowers will feel like a recession. Deteriorating cash generation and adverse borrowing conditions on already leveraged balance sheets open up a new downside scenario, particularly for high yield.
The environment for global credit is still reasonably benign and better outside of Asia than it is in Asia and that limits downside risk, at least for parts of investment grade credits, and for weaker high yield corporates the environment will feel increasingly recessionary.
This environment strongly favours high- over low-credit quality, long-duration over short-duration, financials over non-financial corporates, and investment grade over high yield.
Kaushik Rudra, head of global credit research
Standard Chartered
We are constructive on the Asian high yield space and believe it offers the best risk-reward in the Asian credit space. We expect the next three months to be supportive for Asian credit, with high yield debt in particular generating healthy returns over the period.
We expect the Federal Reserve to begin tapering its quantitative easing (QE) programme in March 2014, or possibly later if data does not improve. Delayed tapering implies an extended period of monetary accommodation. We believe this will be positive for broader risk assets, including credit markets.
We expect this to support the search for yield. Within the credit sector, investors can pick up additional yield by either going down the credit spectrum or going down the term structure. While delayed tapering is likely to make investors more comfortable in taking on duration risk, we would prefer to go down the credit spectrum, focusing on high yield. In our view, the high yield strategy offers better risk-reward.
The Asian high yield sector is also likely to benefit from favourable market technicals. First, we expect the sector to receive fund inflows; while emerging market debt has seen continued outflows (US$3.2 billion) in the weeks following the Fed’s decision to delay tapering, the high yield credit sector has seen healthy inflows (US$15.6 billion) since mid-September.
Second, while primary issuance is likely to pick up across the broader Asian and emerging markets credit space, we do not expect much Asian high yield bond issuance. The absence of additional supply and supportive fund flows should help the Asian high yield space trade with a much firmer tone.