德银-亚洲-信贷市场-亚洲信贷月报-20180131-39页_1mb

Asia Credit Monthly Air Pocket Summary - January 2018

Core Content Overview

This document provides a comprehensive review of the Asia credit market performance in January 2018, highlighting key trends, sector-specific insights, and trade recommendations. The report is authored by credit research analysts at Deutsche Bank, offering a detailed analysis of investment-grade (IG) and high-yield (HY) corporate bonds, sovereign debt, and financial instruments.

Main Points

Market Performance

• Asia Credit: Returned -0.5% in January, underperforming the MSCI Asia ex-Japan index which was up 8.7%.
• IG Returns: Negative at -0.7%.
• HY Returns: Positive at +0.6%.
• HY/IG Spread Ratio: Expected to increase from 2.75x to 3x by year-end.
• Sovereigns: Asia sovereigns tightened by 18bp, with Mongolia showing the most tightening at -57bp.
• CDS vs. Cash: CDS underperformed cash, with iTraxx Asia IG tightening by 3bp, while China CDS was the biggest underperformer among sovereign CDS names.

Macroeconomic Outlook

• A positive macroeconomic environment supports credit spreads, even with rising U.S. Treasury yields.
• The 10yr U.S. Treasury yield is expected to reach 3.5%, where the correlation between higher rates and higher equities may break down.
• The pace of rate increases is a critical factor, with a quick rise potentially hurting investor confidence.

Strategy and Recommendations

• HY Corporates: Remain overweight due to the potential for further tightening, especially in China and Indonesia.
• IG Corporates: Maintain overweight on China and select parts of India and Indonesia, with a preference for BBB over BB.
• Sovereigns: Recommend buying Mongolia 2022s, Indonesia 2024s and 2026 Sukups, and selling Sri Lanka 2027s.
• Financials: Initiate Buy on ICBC Asia C21 AT1s, upgrade BoCAVI 3.5% 2027s and ICBCIL 3.625% 2026s, downgrade Woori C2022 AT1s and others.

Key Risks

• Sharp rate increases in a short period.
• Trade wars.
• Consensus positioning.
• Geopolitical tensions.

Sector-Specific Insights

China Property

• Performance: China property HY bonds outperformed, driven by companies that have de-leveraged or refinanced.
• Supply: Expected to remain high, with new issuers possibly entering the market.
• Strategy: Prefer single B over BB due to higher value. Favor China property developers with strong margins and EBITDA/interest coverage.
• Picks: Aoyuan 2020s, China South City 2021s, Powerlong 2020s, Sunac 2022s.
• Pans: Greenland Group 2024s, KWG Property 2024s.

China and HK Property/Conglomerate IG

• Performance: Strong overall, with GLP 2025s and CK Hutchison curve leading.
• Strategy: Prefer BBB names over single A. Highlight New World China 4.75% 2027s due to attractive valuation.
• Picks: New World China 2027s.
• Pans: China Overseas Land 3.95% 2022s.

HY Corporates

• Top Performers: Oil-related names, Hilong 2020s (Buy), and Parkson, Yingde bonds (due to refinancing clarity).
• Underperformers: Yuhuang 2020s, Reward 2020s, eHi 2022s, and tighter trading BB names.
• Recommendations: Maintain underweight on Car Inc bonds due to competitive pressures. Buy Ruyi 2019s and 2022s due to favorable risk/reward.

China Industrials HY

• Performance: Oil-related names led the way, with Hilong 2020s as a top performer.
• Recommendations: Buy Hilong 2020s, cautious on MIE despite redemption updates.
• Other Picks: Parkson, Yingde, and Ruyi bonds.
• Pans: Yuhuang 2020s, Reward 2020s, eHi 2022s.

Key Recommendation Changes

• Financials: Initiate Buy on ICBC 2.875% 2022s, Downgrade Woori C2022 AT1s from Buy to Hold, Upgrade BoCAVI 3.5% 2027s and ICBCIL 3.625% 2026s from Hold to Buy.
• IG Corporates: Downgrade Paiton 2037, Pertamina 2041s & 2042s to Hold.

Conclusion

The report emphasizes a constructive outlook on the Asia credit market, particularly in HY and select IG segments. While the market is currently in a soft patch, the analysts believe this is temporary and expect a return to positive performance. They maintain a preference for shorter-duration bonds and certain sectors such as commodities and property, while being cautious about the risks of rapid rate hikes and geopolitical tensions. The recommendations reflect a strategic approach to capitalizing on market movements and sector-specific opportunities.