Overview: Dominoes still falling
Credit Strategy: The year in review
Banks Overview: Asian banks: Feeling the weight of leverage
Corporates Overview: 2009: Year of fundamental analysis?
Credit Research: Issuers’ outlook

2008 has been akin to falling dominoes. We
have had funding costs go up, mortgage
markets dysfunctional, asset prices declining,
banks collapsing, insurers in distress, auto
makers on the verge of bankruptcy and
economies in recession. Leverage and
overvalued assets appear to be at the heart of
the problem. The consequent de-leveraging
process continues to cause problems in many
unanticipated ways. The speed and severity of
the crisis has laid bare the darker side of
globalisation. A cancelled Christmas order in
the US can end up shuttering factories in
China overnight, and home price declines in
the US leads to bank recapitalisation in
Germany and the loss of call centre jobs in
India.
􀀗 The rout in the Asian credit markets in 2008
was much worse than we anticipated (see
“Approaching a tipping point”, The View,
Dec07/Jan08). To put the credit losses in
perspective, the HSBC Asian Dollar Bond
Index (ADBI) and Asian high yield corporate
(AHY) indices’ aggregate spreads stood at
751bps and 2,277bps, respectively, on 12
December 2008, compared with 245bps and
477bps, respectively, at the start of 2008.
􀀗 While governments have responded globally
by trying to ease monetary conditions and
strengthen fiscal action, it is uncertain whether
these measures, at this stage, will be adequate
to break the downward spiral of declining
asset prices weighing on economic growth,
and vice versa.

In Asia, the expectation is that growth will be
slower in 2009 but the severity of the
slowdown is still up for debate. In this regard,
China will be key in shaping expectations
within the region. While the Chinese
government has responded positively by
introducing a RMB4 trillion fiscal program
and easing monetary conditions, it is uncertain
if it will be able to offset the impact of global
de-leveraging.
􀀗 Hence, against such an uncertain backdrop, we
believe 2009 will be extremely challenging
and that global credit markets, inclusive of the
Asian universe, will remain volatile. We think
the result of government measures will see a
reflationary credit spread tightening trade in
1Q09 that fades in 2Q09 as higher corporate
defaults and potential bank losses raise fresh
questions about global and regional growth.
We recommend a defensive strategy into 2009
and would urge selling high-yield credits into
any rally in 2009.
Butterfly effect
The past year will be remembered as by far the
worst for modern day financial markets in terms of
price collapse, wealth destruction and severity of
contagion across asset classes and geography.
Recall we had written about ‘Approaching a
tipping point’ at the start of 2008 but could never
have imagined the extent of the global economic
drop in activity and financial losses across multiple
assets classes triggered by the on-going unwinding
of the US residential property and related