Morgan Stanley: Bonds in Taiwan, HK and Malaysia outperformers

Published: Saturday August 24, 2013 MYT 9:50:00 AM
Updated: Saturday August 24, 2013 MYT 9:53:59 AM
Morgan Stanley: Bonds in Taiwan, HK and Malaysia outperformers

KUALA LUMPUR: The current market turmoil over the outflow of funds from Asian bourses on “taper jitters” comes at a time when growth has slowed and Asia has become the most leveraged region in the world, says Morgan Stanley Research.

Consequently, the Asian credit markets are facing an environment that for many corporate borrowers will feel like a recession.

The research house says that it is, at this point, neutral on Asian credit since the environment for global credit is still “reasonably benign” and better than in Asia, which should help, but says it also sees risks skewed to the downside especially for high-yield bonds.

The question it poses is this: Who will be outperformers and underperforms in the current environment?

“Outperformers should be those with relatively stable funding access and relatively stable internal cash generation. Underperformers should be those with weaker funding access and weaker internal cash generation. So who are those?

“In terms of stable funding access, a defensive banking system not plagued by liquidity or asset quality issues of its own is an important advantage.

“Our financials equity research team’s ranking of the systems’ defensive characteristics puts Taiwan, Hong Kong and Malaysia at the top (Philippines banks aren’t covered but would likely rank high as well), with Indonesia and India at the bottom, and China somewhere in the middle,” it says.

According to Morgan Stanley, the challenge to Asia’s credit cycle comes from both ends. An increasingly sluggish growth outlook creates downward pressures on earnings and internal cash generation. In addition, the cost of funding is on the rise.

The rise in US Treasury yields is only one part of this story, it says.

One other big factor is the decline in Asia’s excess saving – a trend that Morgan Stanley says has been in place for five years and has taken loan-deposit ratios in almost every country in the region close to the upper end of regulatory comfort.

In addition, there’s the move by China’s move to re-regulate banks and thereby effectively tightening credit.

“Finally, it’s also a function of the end of ultra-easy global central bank policies, stronger dollar and higher US Treasury yields which have put pressure on deficit economies in the region and forced the Reserve Bank of India to engage in quantitative tightening to defend the rupee and fund its balance of payments gap and the Bank of Indonesia to hike rates.

“We think Hong Kong investment grade corporates look compelling. And we still view banks as more defensive than non-financial corporates and, at roughly equal spreads still, prefer banks across the capital structure,” it concludes.