Updated 21 Jan 2014

Asia

 

 

  • In our first update of 2014, we refresh our proprietary BondScorecard ranking of Asian bond markets

  • SG stays on top while PH, MY, KR and IN improve at the expense of CN, ID and TH

  • Singaporean SGS retains the top ranking as the #1 most attractive local currency sovereign bond market

  • Philippine RPGBs claim the #2 spot – overtaking Chinese Tbonds

  • At #5, we now deem Malaysian MGS more attractive than Indonesian Recaps and ThaiGBs, which fall to #6 and #8, respectively

  • Korean KTBs improve to #7. Indian GSecs reclaim the #9 rank from Vietnamese VGBs, which falls to #10

 

 

BondScorecard Rankings: 21 Jan-2014

 

We refresh our proprietary BondScorecard ranking of Asian bond markets. This is our first update of 2014 since our last back in Dec-2013. The main purpose is to quantify and illustrate relative value and attractiveness among assets across a set of standardized indicators, based on factors we deem most relevant for EM bond investors. That said, while the BondScorecard is a useful - and visual - quantitative tool, bond market rankings and scores should not be interpreted as 1) a portfolio allocation strategy nor as 2) substitute for deep qualitative analysis.

 

EXECUTIVE SUMMARY

 

  • BondScorecard refresh: We refreshed our BondScorecard rankings for recent bond yield and spot FX movements, which have affected relative valuations. This update now reflects the latest macroeconomic assumptions (as provided by the Dec-2013 Consensus Economics polls). We also tweaked some of our weights across the following subcategories, specifically:

 

  1. Yield:Carry (+2.5% to 12.5%)

  2. Yield:Valuations (-2.5% to 12.5%)

  3. FX:Valuations (-2.5% to 12.5%)

  4. FX:Forecasts (+2.5% to 12.5%)

  5. Macro:CPI (+5% to 15%)

  6. Macro:External Account (-5% to 20%)

 

  • While the re-weighting did not significantly shift rankings, we think it better reflects the drivers of performance in 2014, namely Carry, forward-looking FX views and an elevated role of Inflation vs. External Accounts. This is based in part by valuable feedback we've received from Asia Fixed Income practitioners. We kept unchanged the weights across the broad categories: Yield (25%), FX (25%) and Macro Fundamentals (50%).

 

  • SG stays on top while PH, MY, KR and IN improve at the expense of CN, ID and TH: Singaporean SGS retains the top ranking as the #1 most attractive local currency sovereign bond market. Philippine RPGBs claim the #2 spot – overtaking Chinese Tbonds, which we had ranked #1 in our Nov-2013 debut. Taiwanese TGBs hold firm, rounding out the Top Four. At #5, we now deem Malaysian MGS more attractive than Indonesian Recaps and ThaiGBs, which fall to #6 and #8, respectively. Meanwhile, Korean KTBs improve to #7. Indian GSecs reclaim the #9 rank from Vietnamese VGBs, which falls to #10 place, making them once again the least attractive bond market in our coverage.

  • #1 Singapore SGS: For the second consecutive month, we are most upbeat about Singaporean SGS. Singapore tops its peers in the health of its External Accounts (Current Account surplus: 18.9% in 2014f). Moreover, since Nov-2013, bond Valuations have improved after long-end yields drifted 20-50bp higher (5-10yr segment) due to Fed taper concerns and supply concession ahead of a 5yr auction on 21 Jan (which should be offset by SGD2.9bn in bond maturities on 1 Feb). FX Valuations have also become attractive (with spot USD/SGD at the top quartile of its 52wk-range), which nicely sets up the SGD for a rebound in coming months. We anticipate that the MAS will opt on Apr-2014 to continue its modest SGD-NEER appreciation policy, which – although does not guarantee outperformance vs the USD – bolsters the case for outperformance vs a currency basket of its main trading partners. However, SGS are least compelling in terms of Carry and – while Singapore is not as vulnerable to Fed taper as its peers – their high correlation with 10yr US Treasuries (0.94) could drag rates higher. Nevertheless, this could be capped insofar as SGD resumes its appreciation trend (given traditionally inverse relationship between SGD-NEER and Singapore rates).

  • #2 Philippine RPGBs: The Philippines climbs one notch to #2, boosted by FX Valuations, with the peso recently touching 45 to the USD (highest since Sep-2010). We believe that USD/PHP – near the top of its 52wk range – is ripe for a reversal towards 42. Expected FX appreciation would compensate for not-so-attractive Carry (5yr: 2.78%). In fact, low Carry (after 150bp in cumulative Special Deposit Account rate cuts in 2013) and excess peso liquidity may have contributed to peso’s peculiar underperformance (third worst in 2013 after IDR and INR) in spite of robust External Accounts (CA surplus: 2.4% in 2014f). Inflation fears that we first flagged in Nov-2013 are starting to materialize and this will force Carry and bond Valuations to improve in the coming months (regardless whether BSP hikes rates). In turn, this should signal a stronger peso, with one caveat: the risk that the BSP is perceived to be falling ‘behind the curve’, which could punish the peso near-term. Against this backdrop, we “love the currency and loathe the rates” – and recommend selling USD/PHP outright rather than invest in the RPGBs at current Valuations. Elsewhere, the Fiscal outlook has deteriorated slightly (partly due to typhoon reconstruction and provision for future calamities), but this is alleviated by a declining public debt stock (2014f: 45.5% of GDP) and a successful $1.5bn-ROP dollar bond issue (11 Jan).

 

  • #3 China Tbonds: Despite falling in rank for a second consecutive month, China remains a Top Three-pick given relatively low external vulnerability with a region-topping USD3.7trn in FX reserves (+USD400bn since 2012) and 22 months of import cover (2013e). Carry and Yield Valuations have cheapened since Nov-2013 (+15-25bp in 2-10yr segment; 5yr: 4.50%) as domestic liquidity tightens due to a confluence of factors: government-induced de-leveraging, seasonal funding requirements, increased borrowing by cash-strapped institutions and interest rate liberalization (raising negotiable CD and Shibor rates from artificially low levels). While tight liquidity may persist into Chinese Lunar New Year (31 Jan-6 Feb), we are optimistic that Beijing can engineer a squeeze without asphyxiating the banking system and severely hampering growth (7.5% 2014 forecast). If liquidity drains prove counterproductive, then they will be recalibrated accordingly, in our view. Therefore, we do not expect Tbond yield-increase to be sustained for too long. In our Scorecard, China Tbonds are least attractive on the basis of spot FX Valuations, but this is likely to remain the norm ahead of a prospective USD/CNY band-widening, possibly as early as 2Q-3Q14, when the PBOC will have introduced countervailing measures aimed at encouraging domestic outflows. We think CNY will appreciate rather than 1%-depreciation implied by 3-12mth FX forward rates.

 

  • #4 Taiwan TGBs: Forward-looking FX indicators are compelling for the Taiwan Dollar. As of mid-Jan, USD/TWD FX forwards have been pricing in +1% appreciation over the next 12mths (along with PHP and SGD). Similar to the PHP, we view the TWD as an undervalued, CA-surplus (but low-Carry) currency. External Accounts are strong with (2014f trade surplus: 8.9%; FX reserves: USD420bn – second highest in AxJ), but capital account flows deserve to be monitored closely given large equity outflows in 2H13, <100% repatriation of export receipts and emergence of the domestic CNY market. Still, we prefer TWD – in particular against the KRW, where BOK policymakers are more likely to pursue a competitive devaluation versus the Japanese Yen. Finally, while the latest CPI (Dec-2013: 0.33% y-o-y) is likely to be a trough, the CBC is unlikely to raise domestic rates anytime soon.

 

  • #5 Malaysian MGS: Malaysia vaults two spots – mostly because of slippage by Indonesia and Thailand. Since our last refresh, there has been an improvement in Carry (+20-60bp in 2-10yr segment) and FX Valuations (top quintile of 52wk-range). Global growth prospects may improve the External Accounts picture, in particular, raising Malaysia’s Current Account surplus (e2013: 3.3%) as long as incremental export gains exceed government investment-fuelled import growth. Trade surplus improvement would offer a viable counterweight against Malaysia’s persistent Capital Account vulnerabilities, namely still-high foreign bond ownership (Nov-2013: 45% of MGS, 71% of short-term bills outstanding). Inflation outlook is fair with few signs of pass-through from recent administrative price hikes, though it is worth monitoring given barely positive real policy rate (Dec-2013: 2.9% CPI vs 3.0% OPR). We also watch developments in the sovereign’s credit outlook, which remains mixed: positive (Moody’s), stable (S&P) and negative (Fitch). Finally, while the Najib administration is pursuing a fiscal consolidation track (2014 budget deficit target: 3.5% vs. 4% in e2013), much remains to be seen – and desired given a relatively high government debt stock (55% of GDP, excluding quasi-government debt).

 

  • #6 Indonesian IndoGBs: We have become more pessimistic on Recaps. Foreign inflows have halted after offshore investors prematurely purchased IDR30trn in the 3mths ending Nov-2013. Carry and bond Valuations have improved slightly since Dec-2013 (+60-20bp across a flatter 2-10yr curve). FX risks remain pronounced as indicated by a doubling in USD/IDR hedging costs in the past month (7-8% for 12mth-NDF). External Account metrics still look worrisome as policymakers attempt to narrow a yawning CA deficit (2013e: 3.7% of GDP) towards 2%, presumably through a combination of higher domestic rates (+175bp BI hikes in 2013) and a gradually weakening IDR. However, the recently implemented mineral ore export ban (12 Jan) presents an obstacle and reveals the difficulty policymakers face in steering a fragile economy during an election year (legislative: 9 April, presidential: 9 July), especially when neither of the leading parties (Jokowi’s PDIP and Bakrie’s Golkar) is an incumbent (SBY’s PD). On the bright side, Inflation appears relatively tame with little evidence of pass-through from a weaker rupiah and may drift lower according to Consensus Economics forecasts (2014f: 6.2% vs. 8.4% y-o-y in Dec-2013) if sustained. In terms of Fiscal outlook, e2014 budget deficit of 1.8% is low by regional standards. Still, it is still premature to dip into IndoGBs and we foresee more attractive entry opportunities later after bond Valuations improve further, FX conditions stabilize and there is greater clarity on domestic politics.

 

  • #7 Korean KTBs: While Korea’s relative attractiveness has improved from #9 (Nov-2013) to #7, we are still cautious primarily on FX. Valuations on the won are poor (bottom 15% of its 52wk-range) and – unlike the slow-crawling CNY (where officials at least publicly support gradual appreciation) – further KRW appreciation intensifies the risk of heavy-handed intervention from the BOK to stem won strength vs. the JPY. Concerns over the JPY/KRW cross rate are even causing market participants to speculate on a rate cut – as priced by 91-day CD forward rates – after Mar-2014 when the hawkish Gov. Kim Choong Soo ends his term. Although the currency looks unattractive, the rates have been stable with the front-end anchored by prospective BOK accommodation. The long-end, however, faces some tension between rising Inflation expectations (Dec-2013: 1.1% vs. 2.2% y-o-y in 2014f) and shrinking KTB supply on account of 2.1% budget surplus in 2014f. Moreover, pension funds and insurers are purchasing less KTBs than in previous years. We would find shorter-dated KTBs more attractive once the won retraces towards the midpoint of its 52wk-range.

 

  • #8 Thai ThaiGBs: Our scorecard is registering Thailand as a less preferred bond market. A confluence of factors has made ThaiGB Valuations less attractive, namely: Downward revisions to growth, benign Inflation, diminishing likelihood of Fiscal stimulus (we assume a 2014f budget deficit of 3.1%) and the prospect of further BOT easing (after a Dec-2013 surprise cut). On the other hand, FX Valuations have improved as USD/THB cheapened to the top decile of its 52wk-range. However, the political standoff continues to worsen – most recently with explosions (19 Jan) while Bangkok remains under shutdown – intensifying the risks of military intervention and scope for further weakening in the baht. Current tensions between Yingluck’s PT and Suthep’s DP need to be diffused to improve External Accounts, namely portfolio re-flow to add to a small, but positive CA surplus for 2014f (0.7% of GDP).

 

  • #9 Indian GSecs: After dropping 4 places last month to the bottom of the heap, Indian GSecs remain one of the lowest-scoring bond markets. After a significant rally since Nov-2013, bond and FX Valuations remain unattractive. Much of this rally is attributed to one-off developments (e.g. narrower-than-expected current account deficit in Q3, gold import restrictions) and the RBI’s FX swap arrangement that attracted USD34bn in inflows from Nonresident Indians (NRIs). Nevertheless, India still faces underlying BoP challenges (a 2014f CAD of 3.3% of GDP is a regional high). On the positive side, Indian GSecs score highly in terms of: nominal Carry (5yr: 8.70%) and Inflation (WPI expected to decline 200bp in 2014). Political outlook remains cloudy ahead of the nationwide elections due by May-2014 with neither the BJP nor the incumbent Congress parties showing a clear electoral mandate, which means both parties will need to reach out to regional partners to avoid a hung parliament. A prospective correction/consolidation period for GSecs is very likely as domestic liquidity tightens due to fiscal year-end tax flows (Mar-2014) and accelerated election spending. This would be a tactical entry point for initiating fresh longs in Indian GSecs.

 

  • #10 Vietnamese VGBs: Vietnam is our least preferred Asian local bond market. According to Consensus Economics, analysts see Inflation risks returning in 2014f (7.7% y-o-y vs 6.0% in Dec-2013). With an SBV rate of 5.50%, the real (Inflation-adjusted) Policy Rate is negative. The easing bias after a 50bp-cut in July shows that policymakers remain at risk of falling behind the curve even further. While Carry appears nominally attractive (5yr VGB: 8.33% according to ADB), liquidity is too low for us to find current levels attractive.

 

  • Point spread narrows: The Overall point-spread between the best and worst bonds (18.2 between Singapore and Vietnam, respectively) narrowed from 21.4 last month (between Singapore and India). This indicates a slightly lower level of conviction (wider = higher conviction, smaller = lower), though we we clearly prefer Singaporean SGS over Vietnamese VGBs. In Nov-2013, the point-spread was 16.1 between our preferred and least preferred bond markets, China and Vietnam, respectively.

 

ABOUT BONDSCORECARD

 

Purposes:

  • To quantify and illustrate relative value and attractiveness among assets across a set of standardized indicators, based on factors we deem most relevant for EM bond investors.

  • To help organize ideas/data in a practical structure that is flexible, scalable and measurable.

  • To serve as a point of discussion for more in-depth analysis of bond markets, individually or collectively.

  • To provide a bottom-up fundamental approach and alternative to “fair value” models that forecast bond yields over time, which can be equally spurious and subjective.

 

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