HONG KONG, Aug 21 (IFR) - Asian credits were broadly steady hugging recent ranges as investors await the next set of steps from the European Central Bank.
Yet, market participants agree that valuations are getting expensive as technical factors weigh in, with sustained inflows and scant supplies. The iTraxx investment grade index series 17 was at around 144bp/145bp, at the tighter end of the range that has prevailed for most of this month.
Investors have been refraining from unloading assets, though, for fear of being underweight in the case of a rally. “The market needs to get a little more expensive for a sell off as money is still flowing in. No one wants to be underweight at the moment, real money cannot afford not to participate,” said a Singapore based trader.
“There is more risk for investors to miss it when the market goes up than the other way around. But we are coming to the end of that.”
But some investors are hedging their bets, amid doubts about further monetary policy easing by the US Federal Reserve. “The Fed doesn’t have to deliver - they don’t need to deliver if the economy picks up. In the short term selective credits do look expensive - we have been reducing the exposure in the Asian investment grade area,” said Cecilia Chan, Fixed Income CIO, Asia Pacific at HSBC Global Asset Management.
“We need to manage the Treasury risk in the high beta products, hence we have trimmed positions. We are also looking at relative value and on that basis have made switches out of investment grade into high yield, selectively.”
The recent outperformers in the investment grade sector have been the Indian banks as spreads tightened on the back of solid responses to last week’s troika of primary offerings.
ICICI 2018s are indicated at 377bp/373bp after the USD750m 5.5-year deal was sold at 400bp. State Bank of India’s USD1.2bn 2017s were at 336bp/332bp, after being priced at 375bp last month.
“Indian bank senior (bonds) already trades wide versus Asian and global EM BBB peers (and some BB peers), indicating the risk of downgrade to sub-IG and fundamental weakness is already in the price, to a good extent,” said a report from Morgan Stanley.
Disappointing earnings from Chinese energy giant CNOOC had no impact on its bonds as investors focused on the quantum of cash that the world’s most valuable energy explorer generates and its valuation relative to its US counterparts.
The energy giant’s bonds due 2022 are unchanged at 138bp/128bp over US Treasuries and the 2042s are also steady at 130bp/122bp. ”Chinese SOEs are still cheap AA names 10 year paper trading at 135bp are still 50 bp cheap to US credits.
The current levels are expensive relative to Asian historical ranges but it is cheap compared with the sub-100 level at which the US AA-rated oil and gas sector trades,” said the Singapore based trader.
The high yield sector saw a stream of earnings announcements as corporate borrowers rushed to beat the Aug 31 deadline.
Winsway was down 1.5-2 points after it announced a loss of HKD544m in the January-June period, compared with a year ago net profit of HKD811m. Its bonds were last seen at 90/91 following the results with some of the market euphoria built around the 29.9% stake buy in the company by state-owned Aluminum Corporation of China CHALCO) also waning.
Kaisa’s bonds due in 2015 are steady at 100.5/101.5 even after the company announced its total revenue fell 38% and its core profit slumped 28.3%. Traders said that the bonds were held by private banking clients who liked the 13.5% coupon and the short duration. The bonds, when sold in 2010, saw a 47% participation from private banks.
“In the property sector half year performances are not representative of the full year picture,” said a Hong Kong based high yield trader. “In the half year they are not in a hurry to book all the projects. What matters to me at this point is how much cash there is in the company and what are the debt-equity levels.”
Kaisa’s total debt fell by CNY464m to CNY13.2bn and the net debt gearing ratio declined 3.2 percentage points to 73.4%. Cash levels fell 13.5% to CNY3.88bn.