fixed income quarterly investment outlook...fixed income quarterly investment outlook march 2020...

Q1 2020 market review

Fixed Income Quarterly Investment Outlook

March 2020

Experiencing an eventful start, we entered 2020 with the strong momentum from the Phase 1 trade dealbetween the US and China and a 50bps RRR cut announced by the People’s Bank of China (PBoC).Reacting to Iran’s action of striking Saudi Arabia’s oil facilities on 8 January, the generally bullish market sawa brief panic and short-lived selloff. Amid strong market sentiment and relatively high cash level, Januaryposted a record issuance of US$49.8 bn across Asian investment grade and high yield credit.

The COVID-19 outbreak was first reported in Wuhan, Hubei Province in January. Market did not respondmuch to the viral spread as (i) most market participants regarded it as a similar case as the 2003 SARSoutbreak which was a regional outbreak spanning only in China and at most in Asia; and (ii) the outbreakbegan around the Chinese New Year which the market thought the economic impact would be minimizedduring the two-week holiday, i.e. in hindsight the market was too complacent.

China equities market re-opened with a sharp drop on 3 February after the extended holiday. After a briefone-week selloff, the market bounced on the back of a string of positive news, including (i) strong U.S. data(U.S. PMI read and strong nonfarm payroll) and U.S. Q4 corporate results; (ii) expectation of further easingfrom the PBoC; and (iii) some signs of the virus being under control in China with new cases outside ofWuhan slowing and rumors that vaccine was being developed. Market sentiment was further helped by thestrong China A-shares performance (Shenzhen stock market was up 8% and Shanghai stock market up 5%)as well as the resilience of the CNY (below 7.0 vs USD).

Asian credit market was broadly in a risk-on sentiment during the first part of February with hedge fundscovering their short positions and long-only investors topping up. In the absence of new issuance, Chineseproperties names were easily up 2-3pts.

Spread of most IG names was unchanged before the virus outbreak. Even after the outbreak, Macau casino-related bonds still traded only 1-2pts away from the level prior to the outbreak. They were trading against thebackdrop of Macanese government’s decision of temporarily suspending casino operation for 15 days, alongwith negative credit rating comments (S&P ratings put Wynn Resorts and, Melco, Studio City on CreditWatchNegative due to an expected plunge in visitation to the city).

Between late February and early March, the market faced the reality as more companies such as Applewarned investors of a potential supply chain disruption. China’s official manufacturing Purchasing Managers’Index (PMI) in February, plunging to a new low of 35.7, told the market the level of disruption the COVID-19has brought to the country’s economic activities. As the outbreak evolved, Korea and Italy were among thecountries that saw a rapid surge in new infection cases, making it a fatal blow to the market.

Facing the growing fear from COVID-19, U.S. Federal Reserve announced an emergency rate cut of 50bps.The rare intermeeting move, dated 3 March, caught market by surprise. The U.S. Treasury futures fully pricedin a rate cut on the scheduled FOMC meeting in mid-March, but not in an emergency manner as it happened,which caused much panic and confusion. Just right at the time when the market was still trying to measure thepotential impact of the virus and the effectiveness of the rate cut, Saudi Arabia sent the market its surprisedecision to significantly raise oil output above 10 million barrel per day. On 8 March, Lebanon decided todefault on its US$1.2 bn sovereign debt the first time in history.

From there onwards, the market across the board entered its downhill and we all witnessed the below events:

• U.S. stock tumbled, with benchmark posting their worst drop since 1987, where all three major equitiesindices fell more than 9% on 12 March and another record-breaking more than 11% fall on 16 March

• The yield on the 10-year U.S. Treasury Bond fell to a historical intra-day low of 0.32% on 9 March

• The volatility (scariness) hit 82%, higher than any historical instances in the past 30 years (e.g. ’97 AsianFinancial Crisis, ’98 LTCM, ’00-02 Internet Bubble, ’08 GFC, ’10-’12 Euro/Greece Debt Crisis)

• Oil traded below US$20/bbl

• GBP fell to 1.15 vs. USD, rivaling the all-time low of 1.158 recorded in 1984. AUD fell to 0.57 vs. USD

Fixed Income Quarterly Investment Outlook March 2020

U.S. dollar is king when everyone in the market hopes to reduce risk and hold cash.

Concerted central banks actions (See section: Policy response and their implications) began to show effectsin calming the market towards the end of the quarter, in particular after the Fed announced the bond-buyingprogram in IG corporate bonds and the ECB to remove the cap on its asset-buying program.

Together with the quarter-end technical, March ended the turbulent quarter with a level of recovery.Specifically, on Asian credit, during the last week of March, China high yield bond benchmark recovered by10-15pts from the low and the IG benchmark spread rallied 100-150bps. While Asian credit valuation remainsattractive and arguably, China is ahead of the rest of the world in combating COVID-19 and in economicrecovery, we cautioned against a significant number of rating actions by the rating agencies around the globe(See section: Rating downgrades and their impacts on the JACI).

Policy response and their implications

Currently, the scale of fiscal policies in place globally is on par with that of the 2008 Global Financial Crisis(GFC). At the same time, credit supports in place under a joint effort between the Fed and the Treasury areheading beyond what was seen during the GFC (Figure 2).

Figure 1: Summary of policies taken by G7 countries during Q1

Source: Citi research and Value Partners, 31 March 2020

Figure 2: Global policy surpassed ’08 GFC

Source: JP Morgan

Monetary Policy Fiscal Policy

European Union

The ECB unveiled an EUR750bn PEPP until end-2020,

notably accompanied by guidance that more can be done

if needed (March 19) after delivering an insufficient

package on March 12. PEPP purchases began March 26.

On an EU-wide level, there is disagreement over ESM vs

corona bonds, next summit l ikely April 7. Countries will

continue to increase their fiscal packages - Germany

committed EUR156bn in addition to approximately

EUR154bn pledged support packages. Conte has promised

to match another 25bn, if not more.

US

The Fed cut rates by 100bps on March 15 after a 50bps

cut on March 3. After reopening credit swap lines on

March 15, further l iquidity measures such as CP and

MMLF announced as well as enhancing swap lines to

daily. Then, the Fed announced unlimited QE, lending, on

March 23. Fed announced new repo facil ity for FIMA on

March 31.

Phase one was USD8.3bn, phase two was USD104bn and

passed on March 18. Phase three had a USD2tn price tag

and passed on March 27 but Citi Economics calculates

USD1.2tn in direct stimulus, including cash payments and

support for companies. Phase four is l ikely to focus on

infrastructure.

Japan

BoJ emergency meeting on March 16 delivered reinforced

monetary easing. BoJ ready to provide more liquidity if

needed with BoJ offering USD7.bn in 3-10y securities.

First package was insignificant, second package of

USD4bn approved on March 10. Announcement of third

package on April 7. Ruling LDP has submitted a JPY60tn

proposal, with direct fiscal measures amounting to

JPY20tn (USD185bn).

UK

The BoE cut rates by 50bps on March 11 before another

15bps cut on March 19 alongside a QE increase of

GBP200bn. Rates unchanged on March 26 scheduled

meeting, reiterating it can expand asset purchases

further.

After March 20 and March 27 announcements, Citi

Economics calculate that this implies net easing of

between GBP60-70bn (3% of GDP) on top of GBP18bn of

net easing that was otherwise planned (0.8% GDP).

Canada

BoC cut by 50bps each on March 4, March 13, and on

March 27. The BoC also started an asset purchase

program with minimum of CAD5bn/week across the yield

curve on March 27.

The final fiscal package now totals CAD202bn vs

CAD82bn initial, including wage subsidies, credit l ines

and tax deferrals. The direct spending totals CAD107bn.


The Fed’s decision to intervene the banking system directly and almost indiscriminately in a reprise of theformer European Central Bank head, Mario Draghi’s “whatever it takes” moment in 2012 European debtcrisis. We have seen funding in the U.S. market improving steadily. Although both the TED spread andLIBOR-OIS remain wide (Figure3), they have been relatively stable and we have seen the US IG new issueback to normalization (See section Technical fund flows implications) on the last week of March. It will takesome time before we see full normalization of the funding market. The willingness of policy makers to use allthe tools at their disposal is clear, however, it is hard to tell how long the market volatility will last and if thesemeasures are sufficient as it takes time for the full effect of policy response to take hold and the economytrajectory is ultimately determined by the severity of the coronavirus outbreak in each nation.

Figure 3: Stabilizing Ted Spread and Libor-OIS spread

Source: Morgan Stanley

Rating downgrades and their impacts on JACI

While Asian bonds selloff intensified in March, the number of rating downgrade among issuers set its newhigh. A total of 45 issuers (with outstanding bonds worth US$36 bn) was downgraded by rating agencies.Among them, 14 issuers are investment grade rating (outstanding bonds: US$13.5 bn) and 31 of them issuehigh yield bonds (outstanding bonds: US$22.5 bn).

Figure 4: Breakdown of downgraded issuers by geography

Source: Bloomberg

As of 31 March 2020, 6.9% of JACI Index issuers scored a negative outlook by either Moody’s or S&PRatings. Assuming that negative outlook issued by either rating agencies will result in a one-notch ratingdowngrade, issuers subject to the risk of falling out of their current rating bucket take up only 1.85% in theJACI (Figure 5). Therefore, we believe the impact of ratings downgrade is manageable thus far, although weanticipate more rating pressures in the coming months. Issuers in the A and BBB rating bucket have notpriced in the downgrade impact while about half of the issuers in BB and B bucket have priced it in. We lookto monitor credit opportunities of those that have been oversold and have priced in the potential downgrade.

Country No. of Issuers

Outstanding USD Bonds

(in USD million)

China 12 6,914

India 10 11,909

Singapore 8 3,889

Indonesia 5 3,074

South Korea 2 1,130

Hong Kong 2 800

Macao 2 3,850

Thailand 2 2,565

Maldives 1 350

Malaysia 1 1,500

Total 45 35,981


Figure 5: JACI issuers rating downgrade and spread movement

Source: JP Morgan Index, Value Partners, 31 March 2020

Technical fund flows implications

Emerging Market hard currency bond funds have already seen outsized redemptions in March, equivalent to12% of the total assets under management (Figure 6). In March, investors struggled to unwind complex riskparity strategies to raise funds to accommodate possible outflows against the deteriorating outlook. Theilliquidity was also further compounded by margin calls on leveraged products and insufficient balance sheetfor market maker to provide liquidity. We witnessed bond ETF trading at large discounts of 4-6%.

Figure 6: Weekly fund flows (January 2019 - March 2020)

Source: Morgan Stanley Research

Outflow in the hard currency bonds continued but slow during the last week of March to US$7.3 bn (3.53% ofAuM) from US$9.9Bn (4.56% of AuM) for the second last week of March. However, the cumulative outflow asa percentage of AuM is still below other extreme selloff periods such as the taper tantrum in 2013, selloff inChina and Greece’s default in 2015 and the GFC in 2008 (Figure 7). Thus, the risk of continued outflowsremains. Despite outflow episodes, returns have always bottomed ahead of flows. Specifically, returnsbottomed 6, 4, 30 and 12 weeks ahead of flows bottoming in February 2018, May 2016, May 2013 andJanuary 2008, respectively (Figure 8). Therefore, while it is important to note the outflows magnitude reduces,they do not necessarily have to reverse in order to turn more constructive on returns.

Issuers that may move out of rating bucket % in JACI Spread to Treasury if downgraded Current spread Comments

A 0.71 JACI BBB is at 370bp

Credit spreads

are between 118

and 270bp

Price have not factored in rating

downgrade movements

BBB 0.50 JACI BB is at 778bp

Credit spreads

between 101

and 824bp

Only 1 out of 7 Issuer's bonds

have factored in credit

downgrade movements

BB 0.25 JACI B is at 1545bp

Credit spreads

between 409

and 3170bp

3 out of 7 Issuer's bonds have

factored in credit downgrade

movement

B 0.39 JACI C is at 2348bp

Credit spreads

between 855

and 4434bp

7 out of 12 Issuer's bonds have

factored in credit downgrade

movement


Figure 7: EM hard currency outflow (in %AUM) during crisis period


Figure 8: Returns bottoms ahead of flows


Moreover, there are positive news that pension funds have been rebalancing their portfolios. Japan’sGovernment Pension Investment Fund, with assets totaling JPY168.9 trillion ($1.5 trillion), will increase itsallocation of foreign bonds to 25% from 10%, which provides marginal demand for the hard currency bonds.The portfolio change is subject to approval from the Social Security Council. Also, the Government PensionFund Global (GPFG) of Norway is set to become a buyer of massive amount in equities as it also works torebalance its portfolio. U.S. pension funds that delayed rebalancing their portfolios are likely to pump aboutUS$400 bn into stocks over the next two quarters, analysts at JP Morgan said, providing a potential boost toequity markets battered by the coronavirus pandemic.

In Asia, China credits have strong technical support from onshore China credit investors. Asia-basedinvestors account for more than 90% of the demand (Figure 9). Morgan Stanley research’s preferred indicatorof onshore demand is Chinese FX deposit growth versus FX loan growth (the growth differential). The higherthe differential, the greater the demand from Chinese banks for Asia credit. Despite the differential dropping inFebruary, it remains positive and supportive of Asia credit (Figure 10).


Figure 9: China credit market home investors Figure 10: Chinese banks USD credit demand

Source: Morgan Stanley Research Source: Morgan Stanley Research

After the Fed’s decision to buy domestic IG corporate bonds (up to 5 year tenor), new issuance for therelevant issues in March reached a record high of US$246.8 bn, 39% higher than the previous record of$177.7 bn in May 2016. Most issuance came to the secondary market and performed well. With thenormalization of the U.S. IG markets, we expect to see new issuance of Asian IG bonds to come test themarket in the near future, which is an important step of market normalization.

Outlook for Q2 2020

Former Fed chair Janet Yellen pointed out in a conference call lately that the Fed is not going to consider tounwind the latest round of easing policies until it is clear that the economy is back on track and unemploymentis heading back to where it was before the crisis. We think it will be many years before the Fed raise theshort-term rates due to concerns over low inflation. With the tsunami of liquidity from the Fed and low rates foryears, we are of the view that credits and the carry trade will prevail over time once market volatility subsides.

At the point of writing, China shows preliminary signs of recovery. The country’s official manufacturing PMI inMarch improved, up to 52 from 35.7 from a month back, and its production activity is around 85-90% of thepre COVID-19 levels. We expect China to continue to step up policy support, especially financial relief forenterprises and households reeling from the pandemic. We are cautiously adding risks in China propertynames in benchmark, because we see value despite the month-end rally in March. This sector has muchbetter liquidity and is well-supported by better fundamental outlook (i.e. lower refinancing risk). For IG, we arelooking to move up the credit curve and stay with more liquid credits in our portfolio.

Key points to watch over the next few months:• The number of new infection cases in individual countries and the potential second wave of infections in

China• Economic data of countries and any evidence that fiscal and monetary is working• Investor positioning and fund flows in EM hard currency funds

Asian credit sector and geographical view

Asia IG

After a strong January and relatively lackluster February, Asian IG space experienced a sharp selloff in March2020 as COVID-19 concerns caused a systematic unwinding in global risk assets. 1Q20 return of JACI IG (-3.6%) was the third worst after 2Q08 (-5.7%). However, on a relative basis, Asia IG still showed resilienceduring time of stress. JACI IG’s 1Q20 performance (-3.6%) outperformed those of other indices significantly:JACI HY (-12%), CEMBI IG (-10.2%) and EMBI Global IG (global IG sovereign) (-6.3%).

During the March selloff, it’s worth noting that countries with strong local real money support performed thebest. The JACI China (-3.56% YTD), JACI HK (-3.32% YTD) and JACI Korea (-1.65% YTD) are theoutperformers due to strong buying from local banks and insurers, while JACI India (-15.6% YTD), JACIIndonesia (-10.7% YTD) and JACI Malaysia (-6.31% YTD) underperformed due to better selling from globalfunds that experienced redemptions.

On the new issue front, compared to the extremely busy primary activities in both the U.S. and Europe, therewere only two IG new issues from Asia since mid-March (when the global selloff officially started). AIA 10ydeal and BIDU’s dual tranche deal (5y and 10y) both performed very well in secondary, thanks to a decentnew issue premium and improvement in risk sentiment. In our opinion, the two facilities (PMCCF andSMCCF) launched by the Fed to provide liquidity for corporate bond market are the game changer.


Ahead, we expect credit market to remain choppy in 2Q20 as rising defaults, weaker earnings outlook andprolonged lockdown globally will continue to weigh on global risk assets. We are looking to move up the creditcurve and stay with more liquid credits in our portfolio. In the meantime, we will continue to take advantage ofdecent new issue premium offered by primary transactions. A more orderly market will only return when thereare signs of stabilizing COVID-19.

Asia AT1

The sharp selloff in risk assets across the globe has a spillover effect on Asia AT1, which sold off heavily afterholding its ground relatively well even after the number of COVID-19 infected cases continued to rise afterChinese New Year. In Asia, we see banks serving as shock absorbers, cushioning negative economicimpacts. However, government support is a key counterbalance to fundamental concerns. Many bankingsystems in Asia have some government ownership and history of support and forbearance. The standard AT1risks of write down and coupon skip are more remote.

Chinese preference shares outperformed other AT1. It was down 8 -10pts during the panic selloff at one pointand recovered quickly by 6-7pts at the quarter end. It is relatively resilient, compared to the same rated creditsor some IG bonds. The domestic issuance addresses concerns about extension or non-call risk. Also, most ofthe core capitalization for state-owned banks is around 10%. It serves as a buffer to support the asset quality.Official responses to the negative economic shocks rely on banks’ robustness, which is positive for their creditprofiles. In general, we stay optimistic and believe the panic selloff presents a good buying opportunity at abig discount for long term.

China properties

Property sales in 2020 was lackluster as COVID-19 outbreak during the period leading up to the ChineseNew Year. With over 60 provinces or cities in China closing physical sales offices during the holiday and forthe most part of February, business activities were expected to be at a record low with high-frequency datashowing very minimal sales across top 30 cities (Figure 11). However, the contracted sales announced by 34listed names we tracked reported -34% yoy in February, which is helped by aggressive sales campaign,gradual reopening of sales centers and some sales brought forward from previous months. It then followed byanother beat in March with reported sales only down 10% yoy or up 135% mom – showing continuousrecovery as more than 95% of sales office/ construction resumed by end of March. For 2020, we still expectnational sales to remain largely stable with mid-size developers continue to outperform. Major listeddevelopers we are tracking have set reasonable growth target of c.10% yoy, with a few targeting to bring a20-30% growth (Figure 12).

Figure 11: Primary Sales in 30 key cities Figure 12. Listed developers’ 2020E sales target

Source: Citi Research Source: Citi Research

In terms of property policy, we have seen a wide range of local supply-side policies (e.g. relax in pre-salesapprovals; higher leverage for land market etc) after the coronavirus break, and we expect to see moredemand-side policies (e.g. lower down payment requirement, cash subsidy on home purchases, and evenlower mortgage rate) to be used to protect volume downside from possible reduced purchasing power due tothe macro pressure. Amid the massive global monetary easing, we also saw good signs of liquidity looseningin the onshore bond market in March. Various China property HY developers printed onshore bonds atnotably low yield of 3.3-7.5% versus offshore comparables. For instance, SUNAC priced a 2+2yr


corporate bond at 4.78%, while Times China Holdings issued a 3+2yr corporate bond at 5.1%. The strength inonshore bond market provides good funding access for developers. As we saw the spread for onshore vs offshoreyield for same issuer at historical wide, it will also support a gradual compression of the offshore yield. This hasalso been evidenced by the strong onshore buying interest during the recent offshore selloff.

China property USD HY bonds had the worst quarter in performance since 2008, with negative total return of 8%in 1Q20. The rout was triggered by global EM asset managers cutting risk aggressively to meet tremendousredemptions plus private bank clients been forced to cut due to margin calls. The long-dated benchmark bondsonce dipped to as low as 60s, before coming back to 80s by end of March. Despite the bond price volatility, webelieve default risk of China property HY bonds is minimal in 2020, with developers’ proactive fund raising inoffshore USD HY bond market in Jan-Feb (USD23.2bn raised in 1Q20), as well as the loosening onshore creditcondition.

After the sharp selloff, the JACI China Property HY YTW is at 12.6% as of 27 March, with China Property BB at9.9% and China Property B at 14.7% respectively. Historically, we only saw valuations at wider levels duringEuropean debt crisis in 2011 and the Global Financial Crisis in 2008, which were driven by more profound outsideshocks with worse expectation for rising default risk. We see the current valuation as attractive, given we takecomfort from the on-track sales recovery, loosening credit condition, muted near term new issuance, with strongbuying from onshore accounts and family offices. During the quarter, we have also witnessed bond repurchasesfrom 7 property developers, with a total repurchase amount of close to US$400 m, demonstrating their strongliquidity and commitment to liability management. However, with the uncertainties on the path of globalcoronavirus infection rates, the severity of the economic downturn and the timing of any economic recovery, wewill continue to see investors stick to quality, and the valuation gap between stronger and weaker credits to persistin the near term.

Figure 13: JACI China Property BB is at 9.9% YTW AND JACI China Property B is at 14.7%

Source: J.P. Morgan, 27 March 2020

Figure 14: JACI China HY Corp is at YTW 11.6% and CEMBI Broad HY YTW is at 9.3%

Source: J.P. Morgan, 27 March 2020


China industrials

China industrial space sees widened valuation in the first quarter, hurt first by concerns on China’s shutdownand then the liquidity crisis globally. Extreme short-end bonds of quality issuers outperformed as marketexpected the issuers to have sufficient cash on hand or can tap alternative funding sources. Gome andGuanghui Group successfully redeemed their maturity with cash on hand. Longer duration bonds sufferedwith yields for benchmark BB names widened from 5% to more than 10%, while B rated names widened evenmore with thin liquidity.

Looking ahead, we believe refinancing risk is still prominent for this space and expect the dollar bond marketto be less accessible to most HY private industrial companies. Banking support and onshore bond marketaccess, together with companies’ internal cash generating capability, will be key to survival. We continue tobe selective in our positioning in the industrial space.

China onshore rates and credits

Onshore rates

The yield of China onshore rate bonds fell sharply in the Q1 2020. As of 31 March, the yield of 10Y CGBbonds fell by 59bps YTD, the second largest decline since 2003. The yield of 10-year Treasury bonds was2.59% at the last trading day of March, which was close to the lowest point in history (Figure 15).

During this quarter, there were three downward yield triggers of 10Y CGB bonds.

1. 10th Jan - 10th Feb. The COVID-19 began spreading in China, the epidemic has dented the RMB bondmarket. Yield of 10Y CGBs bonds declined rapidly by 30bps to 2.79%. 10th Feb – 20th Feb. With theeffective implementation of epidemic prevention and control, the market expectation about the resumptionof work began to strengthen, and the yield of 10Y CGB rebounded 10bps.

2. 20th Feb - 9th Mar. COVID-19 began to spread overseas, the collapse of risk-on assets led to a surge inChinese bonds, with the yield of 10Y CGB down 37bps from 2.89% to 2.52%. 9th Mar - 19th Mar.Uncontrolled outbreak of COVID-19 in US/Europe and the drastic drop of oil price triggered globallyliquidity crisis. The US dollar index soared and the price of all kinds of assets fell sharply includingChinese onshore bonds, where the yield of 10Y CGBs rose by 21bps.

3. 19th Mar – 31th Mar. The US dollar liquidity crisis eased as Fed announced steps to provide liquidity.Onshore PBOC has taken a series of measures to promote banks to better serve the real economy. Yieldof bonds recovered to 2.59%.

Figure 15: Sharp decline in 10 year CGB and CDB onshore bonds in 1Q 2020

0

20

40

60

80

100

120

140

160

180

200

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Y.Spread of CGB10Y-CGB1Y Y.Spread of CDB10Y-CGB10Y Y.Curve of CGB: 10Y(LHS)

Y.Curve of CGB: 1Y(LHS) Y.Curve of CDB: 10Y(LHS)

Source: Wind


Onshore Credits

The credits didn’t follow the interest rate bonds entirely, as spread did not overly compress in Q1 2020.However, the credit market was still hot. The monthly net financing amount of corporate issuers increasedsignificantly, and coupon issue decreased. Trading volume of the secondary market increased as well and thespread between long-end and short-end narrowed. But companies are still facing greater pressures. Thenumber of credit default has gradually increased, and private enterprises affected by the epidemic are stillfacing greater cash flow pressure. We expect that the government will likely adjust their macro-control policiesto maintain stability.

Onshore outlook

Over the short term, as the overseas outbreak continued, market volatility is to intensify. We believe there willbe fiscal policies in place to guide infrastructure development during the National People's Congress andChinese People's Political Consultative Conference meetings.

Over the medium term, it will take time for China’s economy to recover. The PBoC is expected to maintain itseasing stance, and the bond market is still in a bull run. At present, interest rate bonds and 3-5Y high-ratingcredit bonds are attractively priced. Investors need to pay more attention to the long-end rates and high ratingcredit bonds. If the policy strength is weaker than expected or the pandemic stays longer than initiallyanticipated, the long-end bonds would turn even more attractive.

Indonesia

Like most emerging countries, Indonesia was not immune to the global selloff and investors running for USD.In March, the IDR depreciated by 13.9% (YTD depreciated by approx. 17.4%). From a credit perspective, wesee benchmark INDON 10-year government bonds spread widened from +105 bps in early January to+254bps level as of 31 March. Credit spread for quasi-sovereign like Pertamina widened from +124 bps to+398 bps for the same period.

On the corporate side, we have seen a fair number of downgrades mainly driven by rating agencies’ concernof Indonesia private corporates’ ability to refinance short term USD maturities (pre-2022s debt). TheIndonesia private cooperate credits we track recorded a -18% return as of 31 March which marks one of theworse quarterly returns ever.

While it is very hard to compare the current Indonesia credit market to 2008 as (i) Indonesia Sovereign wasrated Ba3 / BB- by Moody’s and S&P respectively back in 2008; and (ii) the size of this subset was muchsmaller back in 2008, we maintain a cautious stance on Indonesia corporates since (i) It is likely thatIndonesia is behind the curve on the Coronavirus with the risk of surge of new cases in the coming fewweeks; (ii) it is evidenced in the past e.g. 2015 that rating agencies tend to be conservative and pre-emptivelytaking action to downgrade Indonesia Corporates; and (iii) it will take at least 4-6 months for the USD marketto reopen for Indonesia Corporates which add pressure on refinancing.

We are closely monitoring the effectiveness of stimulus plan announced by the Indonesia government. Worthnoting, at the date of writing, Indonesia issued a 3 tranches long dated 10.5yrs, 30.5yrs and 50yrs US dollarbonds with total US$4.3 bn being raised. We view this as an encouraging sign of the first of many steps of thereopening of the dollar funding for Indonesia and boarder Asia EM.

India

Since Q4 2019, we have held an underweight position in India private corporate credits due to (i) theincreasing fiscal deficit; (ii) high amount of BBB- rated credits; (iii) tight valuation with the India BB spacebeing very crowded and largely traded at sub +400 bps credit spread level; and (iv) the difficulty to trackfundamentals of issuers e.g. Non-bank Financial Companies “NBFCs”.

During the quarter, India HY corporates recorded -23% return driven mainly by the Vedanta complex whichtraded down by roughly 50 points due to the drastic drop in oil price. The renewable names were being soldby investors as well due to its long duration and unattractive valuation – these credits were trading at low 5%all-in yield to maturity with average duration more than 3 years. The NBFCs subset also traded downsignificantly at the back of headlines surrounding YES Bank which created concern in the market over NBFCsexposure to domestic banks AT1 instruments.

We are closely monitoring India as Prime Minister announced a 21-day national lockdown from 24 March. Webelieve the fundamentals of India’s private corporates likely worsen in Q2 before recovering.

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Disclaimer:

The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market andother conditions. The information provided does not constitute investment advice and it should not be relied on as such. Allmaterial has been obtained from sources believed to be reliable as of the date of presentation, but its accuracy is notguaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that anysuch statements are not guarantees of any future performance and actual results or developments may differ materially fromthose projected.

This commentary has not been reviewed by the Securities and Futures Commission in Hong Kong. Issuer: Value PartnersHong Kong Limited.

For Singapore investors: This commentary has not been reviewed by Monetary Authority of Singapore. Value Partners AssetManagement Singapore Pte Ltd, Singapore Company Registration No. 200808225G.

Other EM Sovereigns

In EM outside Asia, government has rather limited options to choose from in terms of policy dealing with thepandemic, compared to their developed counterparts, policy ammunition EM has is now running low. ManyEM central banks announced monetary easing policies as quickly as their developed peers even when theyare facing capital flight and their EM currencies have been weakening. EM economies are adversely impactedby COVID-19 following an unprecedented shock to tourism industry and remittance over the short-termcreated by the rapid expansion of lockdowns and other social distancing measures across advancedeconomies and the adoption of the similar distancing arrangement in EM themselves to mitigate the virusspread. Adding on to the fiscal vulnerabilities, 40% of the sovereigns in the JP Morgan Emerging Market BondIndex (EMBI) are net oil exporting countries. Oil prices have fallen more than 60% this year, driven by thecombined effects of the COVID-19 outbreak on oil demand and the fallout of OPEC+ supply consensus. Oilprices level now will hit export revenue and current account positions directly, raising external vulnerabilityrisk in the oil exporting countries. International Monetary Fund (IMF) has pledged different lending facilities,including through rapid-disbursing emergency financing of up to US$50 bn for the most vulnerable lowincome and emerging markets and US$1 trillion lending capacity to help countries fight COVID-19. IMF mayoffer short-term dollar loans to countries that lack enough treasury capability to participate in the Fed's swapprogram to help address a global dollar shortage. We continue to closely monitor on the speed andmagnitude of the measures provided by IMF and other bilateral facilities and remained cautious on EMsovereigns.

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