1、Disclosures&Disclaimer:This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it.The VIEWApril 2019Fixed Income/Asia CreditPlay interview withDevendran MahendranFixed IncomeAsia CreditBy:HSBC Asia credit rese
2、arch teamApril 2019The VIEWWe believe the Asia credit markets are vulnerable to a potential correction in 2Q19,and suggest cutting exposure to sovereigns while increasing financials to reduce volatility Also insideWe keep our cautiously positioned spread forecasts unchanged in the face of slow-motio
3、n risks aheadAsia credits recorded the highest-ever quarterly return in 1Q19.Primary supply remains robust with a diversified mix of issuers,despite the soft economic outlookAsias Bond Markets 1 Fixed Income Asia Credit April 2019 In this months Overview,we think the Asia credit markets are poised t
4、o correct given the rich valuations of certain subsectors,and that there is a“slow-motion risk to spreads”.The Feds dovish tilt and recent soft macro data suggests that all is not well in the world.So much so that we have seen downward revisions to global growth and UST yield forecasts.We studied th
5、e last two major sell-offs in credit markets(they bottomed in February 2016 and January 2019),which showed that certain subsectors tend to be defensive and others more vulnerable to spread widening than others.Our findings suggest that the financial sector is resilient,while the sovereign space can
6、be vulnerable to broader EM sell-offs.While the China property sector was vulnerable in the most recent sell-off,it was tied to domestic policy concerns and refinancing issues.Hence,it is not a given that Chinas property sector will underperform in a broad sell-off as valuations are still within the
7、 norms of past averages.Given the possibility of a correction,we suggest that investors reposition portfolios to reduce exposure to sovereigns and increase exposure to financials.Counter-intuitively,we remain comfortable with China property as there are no near-term fundamental concerns and it is a
8、sector that is under-represented in global EM portfolios.Credit Review:We saw Asia credits with record returns in 1Q19,bringing the highest ever quarterly total returns1 of 4.64%for ADBI and 8.46%for AHBI-Corp.Average spreads of the two indices tightened 39bp and 202bp,respectively,to 167bp and 525b
9、p as of end-March.This was despite a small market pull-back in the last week of March in light of a weaker economic outlook.ADBI and AHBI-Corp set new recent tights on 22 March at 165bp and 507bp,respectively.In the primary market,a total of USD21.8bn Asia USD bonds were issued in March.Although thi
10、s was 2%lower y-o-y,the market had welcomed a more diversified mix of issuers across the credit rating curve,including China LGFVs,Indian banks and financing entities,as well as technology firms.There is no sign of a slowdown in issuance activities.For 1Q19,the total USD bond supply was USD75.5bn.In
11、dias upcoming general election has key political parties making promises to voters that could slow the fiscal consolidation programme over the medium term.Direct cash transfers to lower income groups would cost any new administration anywhere from 0.4%of GDP to as high as 1.7%,if there is no reversa
12、l of existing support schemes,according to HSBC Economics Research.1 Total return defined as sum of capital returns and accrual returns in USD.Editorial THIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLES REPUBLIC OF CHINA(THE“PRC”)(EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)Fixe
13、d Income Asia Credit April 2019 2 Editorial 1 Overview 3 Focus List 21 Credit Review 27 Top and bottom performers of the month 34 Sovereign Risk Analysis 35 Monthly Focus:Republic of India 36 Republic of Indonesia 37 Democratic Socialist Republic of Sri Lanka 45 Company News&Analysis 53 Financial In
14、stitutions 54 Corporates 63 Asian Economics Desk Reference 154 Asia Credit Coverage 158 Spread and Curve Charts 161 Appendix 169 HSBC Databank 170 Disclosure appendix 190 Disclaimer 200 Contents 3 Fixed Income Asia Credit April 2019 Central bank policy and weak data have recast the outlook for credi
15、t markets March was the third consecutive month with strong performance by the Asia credit market from both spread and total return2 perspectives.But some unexpectedly poor economic data eroded investor confidence towards the end of the month,flattening the final performance from a spread viewpoint(
16、see Fig 1).Meanwhile,Asian high-grade and high-yield corporate total returns were amplified by the very powerful US Treasury market rally during March.The European Central Bank(ECB)and the US Federal Reserve(FED)announcing unexpectedly favourable monetary policy decisions post March meetings were th
17、e key catalysts fuelling investors need to add risky financial assets to portfolios,in our opinion.Besides growing confidence that risk-free rates would stay lower for longer,spread compression was a function of portfolio managers having to deploy new inflows as quickly as possible to lessen the und
18、erperformance risk versus their benchmark indices.This belief is best highlighted by active Asian primary markets,thinner new issuer spread premium,and strong spread performance post deal completion in the secondary market trading.From a regional perspective,investors drew comfort from the Chinese a
19、uthorities increasing focus on domestic economic stability.The greater use of the central governments fiscal lever,plus supporting local governments to smoothly refinance and tap capital markets for new financing at lower rates and for longer duration,were considered positives underpinning domestic
20、growth.The central banks desire to push real onshore interest rates lower was taken as a supportive complimentary factor to the fiscal strategy from the financial markets perspective.2 Total returns defined as sum of capital returns and accrual returns in USD.Overview Slow-motion risk to spreads Sti
21、ll constructive about full-year 2019,but we think the market is poised for a correction We recommend reducing exposure to Asia sovereigns while increasing exposure to shorter-dated financials Remain comfortable with our exposure to China property Dilip Shahani Head of Global Research,Asia Pacific Th
22、e Hongkong and Shanghai Banking Corporation Limited .hk+852 2822 4520 Devendran Mahendran Senior Analyst,Sovereigns and FIG The Hongkong and Shanghai Banking Corporation Limited .hk+852 2822 4521 Louisa Lam,CFA Analyst The Hongkong and Shanghai Banking Corporation Limited .hk+852 2996 6586 Keith Cha
23、n Head of Corporate Credit Research,Asia Pacific The Hongkong and Shanghai Banking Corporation Limited .hk+852 2822 4522 Christopher Li Analyst,Financial Institutions The Hongkong and Shanghai Banking Corporation Limited .hk+852 2822 3232 Roanna Chau Associate,Credit Research The Hongkong and Shangh
24、ai Banking Corporation Limited .hk+852 3941 7186 Fig 1 Asia credit spreads:notable tightening in 1Q19 Source:IHS Markit,HSBC 1301501701902102302501/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18 1/19+/-1 stdiBoxx ADBI1672161603003754505256006757501/15 7/151/167/161/177/171/187/181/19+/-1 stdiBoxx AHBI-Corp52
25、5606418 Fixed Income Asia Credit April 2019 4 Investor optimism was,however,dialled back a notch by several factors challenging the future global growth rate trajectory.Regional export data has been generally weak and forward-looking purchasing manager surveys suggest there is no reason to hope for
26、an upturn in the immediate future.Softness in selected US economic data and surprisingly disappointing German manufacturing surveys have magnified concerns that both the industrial and export sectors are possibly facing a sustained downturn that might be spreading across the globe.Remaining construc
27、tive for 2019 while positioning for a potential correction in 2Q While we remain constructive on credit markets for 2019,we think the recent short,sharp rally is poised for a correction and suggest investors position their portfolios accordingly.We have seen significant gains in the iBoxx ADBI and i
28、Boxx AHBI-Corp indices since the sell-off late last year and valuations are at the tight end of historical averages,particularly for investment grade.The Feds dovish tilt and recent soft macro data suggests that all is not well in the world.So much so that Janet Henry,HSBCs Global Chief Economist,ha
29、s revised global growth down to 2.4%in 2019 from 2.6%previously(see Global Economics Quarterly),while Steven Major,HSBCs Global Head of Fixed Income Research,recently revised down his year-end 10 year UST yield forecast by 40bps to 2.1%(see Yanking down the yields:US bond yield forecasts for 2019 an
30、d 2020).To the extent slower global growth serves as a catalyst for a risk-off sentiment,the impact tends to be magnified in emerging markets(EM).To this extent,for various reasons,weakness is starting to emerge in selected EM assets(see Fig 2).All this gives us pause in terms of our optimistic view
31、 of credit markets for 2019,and we suggest investors tactically position for a possible correction.Fig 2 Select EM equity markets,currencies and credit spreads starting to show weakness Source:Bloomberg,HSBC*Dec-2018=100 Source:Bloomberg,HSBC Fig 3 Recommend to reduce Asian sovereign exposure for IG
32、 banks and HY property Source:IHS Markit,HSBC 76828894100106112118828894100106112118124Jan-19Feb-19Mar-19Apr-19Argentina MERVALSao Paulo IndexBorsa Istanbul 100USDARS(RHS)USDBRL(RHS)USDTRY(RHS)15020025030035040045050055080085090095010001050110011501200Jan-19Feb-19Mar-19Apr-19ArgentinaBrazil(RHS)Turk
33、ey(RHS)bpADBI bank IGADBI sovereign IGADBI sovereign HYADBI property IGADBI property HY23456780123456789Yield,%M.dur,yrValuations are rich and there are growth headwinds 5 Fixed Income Asia Credit April 2019 Our study of the last two major sell-offs in credit markets(bottomed in February 2016 and Ja
34、nuary 2019)shows that certain subsectors tend to be defensive and others more vulnerable to spread widening than others.We found that the financial space was defensive,with little movement in spreads in the latest sell-off.While the China property sector was vulnerable,it was tied to domestic policy
35、 concerns and refinancing issues.Hence,it is not a given that the Chinas property sector will underperform in a broad sell-off as valuations are still within the norms of past averages.Our thinking is that from a performance perspective,the sovereign sector is more vulnerable from a broad sell-off a
36、t the moment,as spreads are on the tight-end for investment grade(IG)sovereigns(Fig 3)while high yield(HY)sovereigns in Asia have unresolved fundamental concerns.In addition,from an investors perspective,Asia sovereigns are well represented in global EM portfolios while Asia HY,in particular Chinas
37、property sector,tends to be under-represented in global portfolios and instead has a captive bid in Asia with no near-term refinancing concerns.Given valuations and prospects for weak growth and EM asset prices,we recommend reducing exposure to Asia sovereigns,while increasing exposure to shorter-da
38、ted financials,particularly senior bank debt,to position for a possible correction.At the same time,we remain comfortable with our exposure to China property,as valuations are within previous norms and performance tends to be swayed more by domestic policies and property sector fundamentals,which fo
39、r now remain stable.This does not change our year-end spread targets but we acknowledge that 2Q19 would be somewhat a challenge.Testing investor tenacity We stated last month that it was time for investors to step back and re-examine the operating environment that drives the performance of the Asia
40、credit market from both a spread and total return standpoint.Based on the latest economic data releases,ongoing trade negotiations and the performance of major risk-free debt markets,it is becoming clearer to us that caution is warranted about the direction of Asian credit spreads from 2Q onwards.We
41、 think both Asia high-grade and high-yield credit spreads will widen out,but the magnitude and speed should be less than seen in 2018.Overlaying the constructive US Treasury market forecasts from our Global FI team,we remain comfortable forecasting total returns of 8.3%and 13.9%,respectively,for the
42、 iBoxx ADBI and AHBI-corp for full-year 2019(see Fig 4).Fig 4 Spread unwind limited negative impact on FY19 returns Fig 5 but investors should focus on risk-adjusted returns Source:IHS Markit,Bloomberg,HSBC estimates Source:IHS Markit,HSBC Asia credit spread and capital return forecastMar 19Jun 19fD
43、ec 19fADBI spread167185190AHBI-Corp spread5255805901Q191H19fFY19fADBI total return4.6%5.0%8.3%-Price return3.6%2.8%3.9%-Accrual return1.1%2.2%4.4%AHBI-Corp total return8.5%9.1%13.9%-Price return6.8%5.6%6.8%-Accrual return1.7%3.5%7.1%0%1%2%3%4%5%6%7%1/157/151/167/161/177/171/187/181/1930-day rolling
44、volatility of total returniBoxx ADBIiBoxx AHBI-CorpSovereigns are vulnerable due to tight valuations while China property have no near term risks Position for a potential correction Cautious on trade and messaging from risk free curve Fixed Income Asia Credit April 2019 6 In terms of sector weights
45、versus iBoxx ADBI,we have reduced our sovereign&quasi-sov sub-sectors to slight underweight from neutral while moving our financials sub-sector to neutral from slight underweight.At the same time,we have left our year-end spread forecasts for the iBoxx ADBI and iBoxx AHBI-Corp unchanged from last mo
46、nth(190bp and 590bp,respectively).Risk-taking strategies and buy-on-dip would be the dominant feature of market players,underpinned by expectations of easier global monetary conditions ahead.Having said that,we would expect investors to shift focus towards risk-adjusted performance strategies to off
47、set higher financial market volatility associated with late business cycle uncertainties slowly eroding confidence in the months ahead(see Fig 5).Fig 6 Country and sector allocation strategies against iBoxx ADBI Source:IHS Markit,HSBC;Green denotes upgraded this month and red denotes downgraded this
48、 month Duration extension in the investment-grade space is unexciting,with the US Treasury curve inversion making these securities unattractive to hold versus short-dated risk-free T-bills for the moment.Furthermore,Steve Major believes the easing priced in at the front end has already resulted in a
49、 steeper forward curve,whilst the spot curve has flattened.For the spot curve to steepen beyond the 2-year forward level,it would require the Fed to ease more aggressively than whats currently priced into the curve.This would imply that investors fear a US recession from some unanticipated shock tha
50、t would be bad for the US credit space.For us,the Asia investment-grade space should be most exposed because of the higher non-Asia participation and increased focus on relative value comparison offered during any corrective phase.Definitely,the Asia sovereign and quasi-sovereign issuers should be t
