Credit: Favour rotation from Asian to US credit
We are changing our view for Asian USD credit relative outperformance (see Credit: Assessing the impact from Russian sanctions, 3 Mar 2022) to a guarded stance. Asian credit has far outperformed European credit since the eruption of conflict between Russia and Ukraine, with our Asia ex-Japan DACS being little changed from end-2021 levels, while both European IG and Crossover CDS spreads have already widened to May 2020 highs (see Credit: Downside risks for Europe increasingly priced in, 6 May 2022). However, we now see two major headwinds that could pressure Asian credit.
First, China’s firm commitment to a zero-Covid policy implies a more uncertain and softer growth outlook for China and for the rest of Asia, given China’s outsized impact on the region. Investors are wary of spillovers from lockdowns in major cities, which could exacerbate supply chains woes, weigh on demand for basic materials and distilled products, and inhibit Chinese real estate sales during this crucial period of deleveraging. Liquidity stress in Chinese real estate is still a concern—one of China’s largest developers has missed USD bond payments beyond the grace period, which may trigger cross-defaults on all USD7.7bn worth of its offshore bonds. Even if PBoC increases policy support, there is little wiggle room for dramatic easing with the US Fed set to enact sharp rate hikes.
Second, Asian credit now look relatively less attractive after a substantial widening in US credit spreads. Concerns of Fed rate hikes and QT have weighed on US credit so much that US IG spreads are now higher than its 2019 peak, when financial conditions pressured the Fed to cease its rate hike cycle. This has resulted in Asian USD IG credit losing its historical spread premium relative to US IG. To be fair, Asian credit has much shorter duration than US credit, and its overall spread should naturally see a smaller impact from steeper credit curves compared to the US. But relative valuations have still moved enough that we favour a rotation out of Asian credit to US credit from here.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at email@example.com for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.