-The global economy enters 2009 in awful condition, with pretty much every
financial time series you can find pricing in a historically grim picture.
We think that the market has only begun to downgrade Asian growth, and see
further downside revisions as a near certainty.
- In this environment, government bond markets should easily outperform
equity early in 2009. Asian forward curves have yet to price in our
expected monetary policy response, and the long end of many yield curves
will have a tendency to overshoot fair value on the downside early in 2009.
Korea stands out as the clearest case for a duration overweight position.
- For a long-term perspective, we use a measure of the equity risk premium
to back out implied growth shocks for Asia. Based on any reasonable
judgment of Asia's long-term growth potential, these show bond markets to
be too expensive relative to equities. This will become relevant for bond
markets once growth expectations stabilize. They also support a rank
ordering of relative value in Asian bond markets where again, Korea stands
out as the cheapest.
- We think that credit will be a good bridge investment between short-term
returns on government bonds in early 2009 and equities in 2010 and beyond.
Macro policy developments and cheap pricing argue in favor of credit. From
a relative value perspective we still find Asian credit to be inexpensive
relative to Europe and the US, and with a slightly more benign outlook.
- China: Market sentiment towards the RMB has shifted drastically, though
we would argue a major trend reversal in USD/CNY is very unlikely. The
ability for Chinese local markets to absorb larger than expected fiscal
stimulus is enormous. This highlights the risks for further downside on
interest rates and a steeper curve especially on the ND-IRS curve.
- Hong Kong: While banking sector liquidity is set to improve, huge fiscal
requirements would imply more active HKD rates, higher USD/HKD and a
steeper curve. We enter the year neutral duration on HKD fixed income but
look to reduce exposure on out-performance to UST. Expect 2Y/10Y IRS to be
much steeper over the course of the year.
- India: The policy roadmap for 2009 is clear ? monetary easing will have
to continue doing the heavy lifting in India, given that a poor budgetary
position to begin with has left little room for effective fiscal
stimulus.We continue to be overweight on duration going into 2009, as we
see the local curves yet to price in the scale of monetary response we
expect over the next few months. The government bond curve is likely to
continue to bull flatten in this rally, and we could see 10 year cash bond
yields extending lower to 5%.
- Indonesia: The state of global risk appetite will be critical to shaping
the outcome for Indonesian local markets in the New Year. We don't like the
risk-reward on being long government bonds at current levels, and will look
for cheaper entry points in the front to mid-end of the curve over the next
few months. The near-term downside risks we anticipate on IDR seem to be
well priced into the NDFs already. We think onshore forwards provide a
better avenue for real money investors to hedge their currency risk.
- Malaysia: With growth risks skewed to the downside, we expect the
Malaysian policy response to feature more aggressive fiscal expansion than
monetary accommodation, with implications on our view of the yield curve.
The short end of the curve already seems to price in our expected response
from the BNM. Whereas the long end of the curve is not pricing the
potential supply implications of expanding fiscal policy. The swap curve
has run well ahead of the cash curve, making it especially expensive, and
our favorite way of getting underweight duration in this market.
- Philippines: The outlook on domestic policy dynamics and demand-supply
technicals calls for lower bond yields and steeper local market curves in
the year ahead. We recommend being long the 2-5 year part of the curve,
with FX exposure. Technicals on sovereign external debt look supportive,
but neither the trajectory of fundamental credit quality nor relative
pricing (especially versus other credit markets) seems particularly
attractive.
- Singapore: With expectations of a resumption of SGD appreciation
disappearing from the horizon, we see no good reason to expect SGD rates to
remain below USD rates in the short end of the curve. 2Y swaps should
continue to underperform the USD curve. Demand in the long end for SGS
should continue to be strong early in 2009 with well contained fiscal
supply pressures. By contrast the flattening of the USD curve could be
hampered by supply issues. We expect the SGD curve to continue flattening
relative to the USD curve as a result.
- Korea: Spot USD/KRW is likely to remain very choppy in H1 within a broad
1500-1250 range, in our view. However a more sustained trend of
appreciation of the won is likely to unfold when the outlook on global
growth starts to improve by around mid-year. We enter the year long
duration on Korean fixed income via receive 3Y IRS, long 1Y/3Y and 2Y/10Y
steepeners as well as maintaining exposure to our long-held 2Y onshore USD
ASW exposure. Finally we look for the long-end of the KTB curve to
outperform IRS and suggest a 3Y/10Y ASW box trade to capture this view.
- Taiwan: We look to enter 2009 neutral duration but long 2Y/10Y
steepeners. We think there might be tactical opportunities to receive IRS
on short-covering in Q1-09 (at around 1.8%) but we think steepening led by
lower front-end rates is the most likely trend. On currency, we expect
USD/TWD to make a new all time high above 35.50, but expect TWD to
outperform some of its regional peers thanks to continued repatriation
inflows from local retail and institutional investors.
- Thailand: We recommend going into 2009 with an overweight duration
position, shifting to a duration neutral steepening position around mid-way
through 2009. In dealing with the crisis, weak government(s) will hamper
fiscal expansion, leaving pressure on the BoT to support growth with lower
rates. The short end of the curve has yet to price in our rate cut
expectations.
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