Prefer Corporate to Government bonds; EM to DM

We are Overweight Emerging Market (EM) credit, given the brighter macro growth story and buoyant trade picture among EM economies.
Hou Wey Fook, Willie Keng16 Apr 2018
Photo credit: AFP Photo

Credit spreads found in corporate bonds would help mitigate the impact of the Federal Reserve’s rate hikes as compared to Treasury or government securities. This is because of the coupon carry, which is expected to contribute to the larger proportion of the total return of this asset class of bonds in 2018.

We are Overweight Emerging Market (EM) credit, given the brighter macro growth story and buoyant trade picture among EM economies. From a bottom-up perspective, we observe that EM corporates have bolstered their balance sheet structures and that their overall profitability is expected to improve alongside global growth. In addition, EM High Yield remains characterised by modest default rates and having credits of CCC ratings as compared to the Developed Market (DM) High Yield.

Stay within BBB- and BB-rated credit buckets. Amid yield spread compressions in favour of lower-risk rated credits in the past months, we continue to argue our preference for bonds of BBB over A ratings as well as for bonds of BB over B ratings, as they reflect better risk-adjusted returns. On an opportunistic basis, we would seek out credits at the lower end of the credit curve when they have either been temporarily overshadowed by idiosyncratic events, or when the market has placed unduly pessimism over their credit fundamentals.

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