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Keep Calm and Carry On
We are constructive on corporate credit globally, and expect the Asian risk
premium over Developed markets to gradually compress. A US growth
slowdown to 2% but short of a a double dip, although raising the probability
of tail-risks, will keep DM credit in a relative ‘sweet spot’ of low rates and a lid
on credit-unfriendly actions, while valuations and liquidity support Asia in
spite of ‘equity-friendly’ growth rates.
Technicals and Valuations support Asia
We expect Asian credit spreads to increasingly converge with DM spreads,
driven by asset allocation trends, healthy balance sheet liquidity and an
increasingly reduced emphasis on liquidity premiums.
The Future of Asian Credit Markets
The Asian credit markets are in the midst of a secular change. Both the
demand side and supply side are growing much faster than the historical
norm. We expect the next five years to be very different to the past five years
and expect the non-Financial credit market in Asia to quadruple in 2015. .
Key themes in Asia:
Prefer HY over IG, due to unusually steep credit quality curves, shrinking all-
in yields, unusually strong corporate liquidity profiles and a supportive
cyclical backdrop;
Prefer China Property within Asian HY, powered by valuations, a policy
cycle increasingly on hold and an improving Chinese credit cycle ; and
Prefer Bank Capital, as regulatory change represents a powerful, credit
friendly de-risking trend and valuations still look compelling.
Cautious on Australian banks, due to concerns about significant funding
needs for 2010-2011 and increasingly bubble-like housing valuations.
Uncomfortable with Quasi-sovereign valuations. Global quasi-sovereign
valuations are increasingly stretched and Asia is richer than CEMEEA and
LATAM. Our Quasi-sovereign score provides guidance.