Asia Credit:Monday Tidbits -What are investors asking us?

How are the fund flows and cash balances.

    Fund managers continue to report stable/small inflows. We haven’t heard ofany outflows, except the occasional rotation out of fixed income into equities(to be clear, this is not a trend). In cash balances, it’s always hard to get anexact number, albeit we sense that they were built up late last year as marketsweakened a bit and investors locked in returns for the year. This cash is nowbeing deployed and partly causing the stronger than expected start to 2018despite heavy supply.

    Why have the AT1s been rallying this week.

    Bank AT1s have actually been lagging since late last year, perhaps on the backof some structured trade unwinds. However, as highlighted in our report onJan 10, they have started looking attractive versus DM peers. Plus, supply inthe USD space might not be as much as feared. Hence, we think the ongoingrally might have more legs. On a separate note, we highlight that the corporateperps in general have also lagged and the high ones could represent a goodalternative to the senior bonds.

    Are Taiwan insurers still selling long end bonds.

    No, at least not that we are seeing. The selling earlier was perhaps partlydriven by the implementation of IFRS 9. However, we don’t think that was themain reason as IFRS 9 has been well known and more importantly, some ofthe insurers are likely to delay the implementation. We believe the selling wasalso driven by TWD appreciation against the USD as the insurers sold highcash price bonds in profit to offset FX losses.

    What are Chinese investors doing.

    The strength of China bid has waned versus say 6-12 months, though wehaven’t seen incremental weakness in recent weeks. While Chinese investorsare looking more into Latam and Ceemea, they haven’t ignored Asia. Cash ismostly being deployed from existing USD balances and not so much fromRMB conversion to USD. Hence, higher onshore rates and USD weaknesshasn’t really dampened the appetite for USD assets. In fact, one of the largebank treasury desks we met expects its USD deposit base to keep growing andpotentially buying the same quantum of China IG bonds as last year (albeitadditional buying on top might happen outside Asia).

    What are the most consensus views.

    Long short dated HY (even 364 day bonds), Overweight commodities, Hugesupply expectations from China, Constructive India and Indonesia view on lackof supply, Preference for BBBs over AA/As as better spread cushion againsthigher rates (albeit less consensus on Bs vs. BBs), Cautious view on Chineseinsurers, etc.

    Do you cover LGFVs? Could we see a default this year.

    No, we don’t cover LGFVs. We rather channel our energy into the more liquidbonds and names that offer transparency for us to track. On a similar vein, weare selective in our coverage of the China HY industrials, picking credits thatare rated and/or listed. As for possible LGFV default, we won’t rule it out for asmall, less strategic one, on local debt (not USD bond) this year. It will be morea signal from the government as warnings to investors for not assuming animplicit guarantee have fallen on deaf ears. We are already seeing a few delaysin onshore debt repayment from LGFVs.