Welcome to Know More, Risk Better, a Credit Sites podcast. Across the global strategy team, we aim to make sense of the macro and the micro, highlighting opportunities and the risks facing the fixed income markets. As the macro makes headlines, we leverage our network of experts across fixed solutions to better understand economic trends, rates, gyrations, geopolitical events, and how these factors impact corporates. At Credit Sites, we understand that credit investing comes down to picking winners to generate alpha and avoiding losers.
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This is Winnie Cesar, global head of strategy. And today we have an international podcast. We have Zulina Zing, our head of Asia strategy, joining us because she just got back from a very long trip to Hong Kong and Macau to talk to investors and perhaps more importantly, check out what's going on in the casinos. Zulina, welcome back and thanks for joining me.
Thanks, Winnie. Thanks for having me. Well, I know that people are going to be very interested in what you have to say because pretty much every client I talk to is asking, what on earth are non-U.S. investors doing in this current environment?
You know, there's a lot of chaos, a lot of headlines, especially related to China and Asia and the U.S. relationship. So first, let's set the stage a little bit. Who are the investors that you met with in Hong Kong last week?
You know, kind of give me the landscape. Yeah, sure. We met actually a very wide range of market participants in Asian credits as well as U.S. and Euro credits in Hong Kong last week.
These include insurance companies, both lifers, PNCs. There are some of the pan-Asian insurers as well as regional ones, such as Chinese ones. Private banks, family offices. Some of them are regional private banks with mainly Chinese customers or some of the Southeast Asian customers, but a lot of them are global family offices and private banks.
They have Chinese and global asset managers, they have treasury teams, security houses, both global ones and Chinese ones, some of the credit hedge funds and the dealers. So it's quite a diverse mix of clients that we met in Hong Kong. I'm impressed that you made it through that schedule and lived to tell the tale of all of the meetings that you did because that is a lot to jam in in one week. And you're only in Hong Kong three days, which means you met with all of those people across three days, which seems like a heroic effort.
Yeah, because clients are also a bit confused about what to do in the second half of the year, and they're quite keen to talk with independent research houses like us. Yes, but I didn't want my shoes off almost. Well, now you can go by yourself a new pair of shoes, hopefully not at an elevated tariff rate. So I think that that sets us up nicely for the next question, which is how is investor sentiment post the sell-off and then just crazy rapid rebound in April?
If people are confused, does that mean they're also negative? Yeah, I would say they're turning a bit more negative or more defensive. Most of the credit investors we spoke with, especially the real money ones, insurers, private banks, as well as some of the regional asset managers, they're turning very defensive. And there's a very clear shift from the BBB for IG investors to A and above those rating markets.
And for high-yield investors, we pointed out in the past, they were really chasing yields, but now they're pretty happy with 6% to 7% of that type of yield and stay with higher quality names in a BBB bucket. We also received a last pushback on our year-end spread targets for Asia IG at 100 to 110 basis points and Asia high yield at 450 basis points. I still remember early this year when I was marketing in other Southeast Asian markets, people were thinking we're pretty crazy for these type of spread levels, but actually in early April, Asia high yield had already overshot, so now it looks like quite realistic. And most of the investors agreed with our review that the spread widening post-deliberation day was relatively contained compared to the private prior market sell-offs, like the big ones, global financial crisis, cold hits, or even the slightly smaller sell-off, one like the Fed Taper, as well as the Trump trade war 0.1.
So the shallow rebound of Asia high yields compared with the US and Euro high yields, as well as Asian equities, also reflected this shift of mind-sight set from Asian investors that really they want to stay defensive for the rest of the year and protecting return has become really important. And most of the investors, they still prefer new shoes with good concessions over chasing the laggards from the recent rebound, a few we also tend to agree, but they also pointed out that the rate's volatility and tariff headlines have deterred a lot of Asian issuers from typing the market, and this is likely to continue to be the case in the second half of the year. Interestingly to note, I think the cash level of a lot of the real money investors that we spoke with is much higher compared to year-end last year because they de-risked in the early April, and they sold some of the high cash bonds in anticipation of the redemption. Now things become a bit difficult because redemptions haven't really happened, but they sold it at the market bottom, so a lot of them feel like this year will be quite difficult for both access and total returns as they miss the fast rebound of some of the higher quality names on the second and third week of April.
Yeah, that's really interesting. I think that that push and pull between technicals, I think, have surprised a lot of people given the level of volatility redemptions just did not materialize nearly as severely as one would have perhaps expected, and now as everybody's kind of recalibrating economic expectations to something a little bit more negative, it seems like we're sitting on higher cash balances, and so I was talking to a client today, and it seems like it will be more painful for clients if spreads grind tighter rather than if they gap out, and so I think that that's a really kind of interesting positioning nuance that we have ended up in right now. So, you know, if clients kind of missed the bottom and now have some outsized cash, how are they thinking about the market in terms of generating some return or protecting from the downside? I think most Asian credit investors are not in a rush to deploy.
Some of them think there will be another big market drawdown because maybe the survey data, the weak survey data in the U.S. will turn to hard economic data, maybe earnings will miss and the equity analyst will revise down their earnings forecast, things like that. So other than that, the U.S. rates volatility is still very high, and most Asian clients think tariffs still have a lot of uncertainty.
They don't really believe the big negotiations will really happen over the next months. So overall investor, the top priority is really no protecting return, and one of the view is diversification across markets, sectors, and currencies. This is also the view we have been talking about since second half last year, actually. I think most Asian investors, as part of their diversification strategy, they have invested quite heavily in U.S.
IG, especially the U.S. banks and some of the A-rated names, and for Asian investors, definitely the auto sector because this is really easy for them to understand. And some of the investors are also engaged in Euro 81, those bank capital instruments. But standing at this point, I think a lot of Asian investors are a bit concerned about U.S.
IG as well as U.S. high yields because of the outside movement in April. And another concern is about the potential structural deterioration of USD as well as USD-denominated assets. So a lot of the lifers, real money guys, especially the private banks, they're getting a bit concerned because over the past two years, they shifted so much of their wealth into the U.S.-denominated assets.
And it looks like U.S. assets might not be a safe haven anymore. So a lot of the conversation with the clients are about our trade ideas in Euro and Asian local currency bonds, especially in Australian dollars, SING dollar, as well as Aungshul, RMB, given their outperformance in April. And it looks like the Asian duration is still outperforming U.S.
treasury throughout the rest of April. And I think clients probably have paid attention to the headline that Taiwan dollar had a very big outside movement last week. So the one-month dollar Taiwan forward tumbled about 12% in two days that was like never seen in history. So that also triggered concern about the Taiwanese lifers or a lot of the exporters will continue reducing their dollar holding activities or put on more dollar hedging activities that will put for the pressure on U.S.
dollar in the future. So this is a really quite big theme in Asia as in how investors could diversify outside from U.S. denominated assets. I think as of now, we are not really seeing a massive offloading of U.S.
denominated assets, but the trend is really there. Yeah, this is so interesting. And I think for kind of two key reasons, you know, the first is the bid from Asia for U.S.D., especially U.S. IG, has been significant for a long time now.
And while we're not necessarily seeing significant outflows or outright selling, the lack of that marginal bid or demand feels like it could be quite meaningful. And at the same time, this shift in broad-based confidence in kind of U.S.D. assets. And we're definitely seeing within the treasury yield curve a twist steeper lately.
So long-end yields and short-end yields are moving in opposite directions, which is a little bit unusual and also perhaps reinforced by some of these non-U.S. investor expectations and sentiment, you know, assigning a higher risk premium for long-rated U.S. treasuries. I'm curious, is there something that you think could reverse the negative sentiment?
Is it just as easy as Trump coming to the table and saying, hey, I've negotiated all of these trade deals and things are great again and it's going to be fine? Or do you think more damage has been done that's going to take longer to actually put back together? Yeah, I think my impression is the damage has been done. Over the past decade, I think Asian investors, especially the real money pensions, lifers in Asia, they accumulated a lot of U.S.
IG holdings. And this is under the perception that U.S. institutional settings is just exceptional. The return of U.S.
assets are also exceptional and a lot of the U.S. technology companies and the broader American Inc. are going to do better than Asian companies. But it feels like this is not the case anymore.
A lot of the clients we met are now talking about the increased term premium on U.S. treasury. I still remember last year, at the end of last year, earlier this year, when we were talking about our base case yield of Fed on hold in 2025 and then U.S. 10-year yield at 4.75% at this year-end, a lot of clients are thinking we are crazy.
But this no-base case does not look crazy anymore and actually a lot of clients agree with us. Many investors are also sharing our concerns about the market underpricing the impact of tariff on U.S. inflation. And I would say a lot of Asian clients think inflation is transitory because of the tariff impact.
And some of them are also concerned about higher U.S. treasury supply in the second half after the debt ceiling is resolved. And they're interested in our review on that, especially in terms of the supply, whether it's short-end value or more of the long-end. So I think because of that, the duration view here is very bearish.
And I was a little bit surprised to hear even the lifers, their average duration is only around five-year and some of the Chinese lifers is less than five-year. And for the private banks, securities houses, and bank securities, it's really just two to three-year. I think some of them added a little bit of duration because they think the credit curve now is getting steeper. So there's some value at the long end.
So they increased a bit from the start of the year, which is around 1.5 to two-year. So yeah, overall, it feels like a bit shocking that the duration position is quite bearish and overall duration is very short in Asia. I mean, that is shocking that you have lifers with such short duration. You would think that structurally that would not be a particularly attractive operating environment, especially now, IG yields in the long end are above 6%, which is historically pretty attractive.
So I think that there's a lot of really interesting things to consider in terms of just kind of how much sentiment has shifted. And we too are receiving a lot less pushback on our credit call and our 10-year treasury at 475, which makes me think we have to change our forecast because once everybody is starting to agree with me, then I need to figure out how we could be wrong. Like, are we going to go materially lower? Are we actually going to 5.5%?
It feels like there's a lot of different outcomes. Yeah, I think the Asian credit investors in terms of their duration positioning, they're not as agile as European and U.S. ones. A lot of them, for them to increase the allocation too long and they need to get internal approvals and that takes quite a long time.
And now these days, the U.S. rates movement very fast and furious. And by the time they get internal approval, the 10-year is already down 20, 50 basis points, so they miss the chance. So it's very difficult for a lot of these Asian accounts.
Yeah, that's really tricky when you have to run these decisions through so many different layers. So if it seems like the trade of U.S. exceptionalism and U.S. asset outperformance is fading, what do you think that the consensus is now?
Where are the consensus trades? And then are there others that you think are a little bit more debated or interesting still? Yeah, I think right now the biggest consensus is no going defensive, especially for IG investors. So some of the sectors most of the IG investors like would be the bank seniors of Singapore, Australian, Middle East banks and some of the Pan-Asia insurers, Korean, Malaysian, Quasis, Indonesian sovereigns, Chinese banks, including the floaters, some of the Chinese SOEs, A-rated China tech and some of them are also looking at the Japanese financials as well.
And most of these are included in our systematic portfolio of defensive trades, which we have been talking about since late last year. Then the most debated ones are the high beta, triple B related names. I think it's a bit difficult which they don't want or they go down in credit quality. So for those who do have a hurdle rate, they do need to pick some high beta IG tickers.
But this area is very debated. So some clients like Korean corporates and triple B related China tech. But these names are quite volatile. One quite crowded position is Japanese lifers.
Clients thought these are A-rated names and there's a spread pickup and then there's good news supply. So they expect this to be a very defensive sector. But it turned out because of the large news supply and also the participation, the high participation of global investors in this sector is very volatile and it turned out to be a high beta sector. So I see a lot of investors are trying to trim a bit from Japanese financials and moving a bit to Australian financials which are a bit more stable than India financials and corporates.
Some clients like because of their concerns about China macro, Chinese properties, but the valuation is very expensive. Then the Asian gaming sector, but it turned out the sector is always very cyclical and the capital sensitivity is very high and there's a lot of corporate governance concerns especially for the Malaysian gaming names. So I think for Asian clients, those with a hurdle rate of return, this is going to be a difficult year especially given the higher quality triple B names. They already rebounded in the second half of April and for those still can offer some yields.
There is some credit weakness here and there. Yeah, it's interesting. I would say that talking to U.S.-based investors, the view of looking for financials as kind of a safe haven or more defensive is quite persistent and the U.S. banks reported generally good Q1 earnings and not necessarily any big concerns around the broader macro from a low loss and kind of provisioning standpoint.
So I think that that has allowed people to feel a little bit better about the financial sector in the U.S. as well and it seems like financials is a big area of focus for a lot of our Asian investing clients as well. So we do have some top picks at credit sites that might be a little bit controversial or at least launching some interesting debates and conversations especially in sectors like Hong Kong property or global autos where I think that investors are generally kind of negative and pretty much every client I've spoken with in the U.S. has said that they are underweight autos right now.
So where are you receiving the pushback on some of our top picks? Yeah, sure. That is always the fun part of the conversation every time. As you mentioned, the biggest pushback is really on Hong Kong property and I think it really depends on the client type.
For Hong Kong-based family offices and wealth clients, they're fine with the outlook of Hong Kong property sector especially the residential market because the developers are slashing prices so the transaction volume is picking up and that means probably faster cash collection for the developers but the mainland China clients as well as some of the other regional clients are just sort of skeptical because of the CR issues which is not just for Hong Kong but a lot of other DM markets as well. We went to some of the shopping malls in Hong Kong. The food traffic was great especially with the golden week holiday but there's a general trend of consumption downgrade so the pop-up shops with lower ticket consumer items tend to have more visits. and purchases but if you go to the luxury shops then the purchase is not that high and then in the residential market people are still quite concerned about high mortgage rates because the hong kong hkma their rate decision is kind of tied to the fad and now it looks a bit uncertain what the fad is going to do and also the um the rental yield is still below the return of some of the fixed income instruments so the people's view on the residential market outlook is quite mixed and with the capital markets still very subdued in hong kong then the office occupancy is still low and there is a persistent negative office rental reversion so the macro outlook is not that great i think our peak of the sector is really because of the relative value and we think some of the a rated higher quality names they have rock solid balance sheet and they're going to pull through this industry downturn and then in the simple b rated names um it's really a lot of questions about distressed names such as newer developments because the pbs have a lot of exposure on that um i think the second area with a lot of pushback is indonesia macro and indonesia our picks in indonesia credits um clients are getting more concerned about the fiscal and policy risks in indonesia um i think you did an earlier webinar with our southeast asian analyst locks and there were a lot more details on our analysis of the recent political and macro development in indonesia basically clients are very concerned about this new sovereign fund danatara and the fact that the government is increasing the realty mining mining royalties from a lot of the commodity soes and just overall these concern for global recession and low commodity prices are amazing clients they want to do risk in commodity related names including the indonesia soes as well as some of the high yield commodity tickers in indonesia then lastly as you mentioned the global auto our picks um in asia is a hondai motor and hondai capital kiyamoto these ones get a lot of pushback people understand our view is based on relative value but most really like to treat exposures to any credits credits that are at risk of u.s tariff and auto sector is really being one and some clients mentioned there will be macro implications for markets like korea and japan for instance in japan there are over 300 smes are linked to the auto supply chains and in japan it doesn't look like they have a very strong policy bank to provide a lot of industrial subsidies as in china so i think clients definitely want to avoid names and factors that are very exposed to u.s tariff even though we are hearing headlines of ongoing negotiation between u.s and unfitting partners in asia yeah it's so interesting that the headlines of these big corporate issuers around tariffs get kind of the front and center press but you know to your point small medium-sized businesses globally are so vulnerable to so many of these things and that's a big part of economic growth that's a big part of employment and i would expect that you know small medium enterprises have more challenged profit margins you know more willingness to have to lay off or cost cut if there are going to be challenges or you know just outright bankruptcies and restructurings and these companies happen to kind of close up shop if we don't see some sort of resolution and i guess that leads me to the next topic which is the trade war it seems like most clients i talk to in the u.s kind of view two separate trade situations happening right now we have u.s china which seems to be a pretty significant trade war and escalation given the initial tariffs and the retaliatory tariffs and the escalation it's you know we're effectively at a u.s china embargo in a lot of ways versus everyone else and most clients say that kind of everyone else they think that there will be some relatively easy victories and some negotiations and we kind of check that box and we move on but china matters a lot right 2018 was not an easy year for markets and there was a lot of negative sentiment around global growth and potential recession and that was just u.s china for the most part and a much smaller concentration of the goods so are we in a full-blown trade war right now between u.s and china is that the kind of on-the-ground hong kong investor view do they see a way out what is happening here yeah i think it's very interesting because china is definitely in the crosshairs of this trade war with the u.s but we do see an outperformance of a lot of the china sectors in the april sale of for instance higher quality china tech than the ig soes including the national oils but as well as some of the ig soe property names especially given the still domestic problems and property industrial downturn but these admins they outperformed the as well as a lot of the other markets when people thought would be more resilient like japan and korea and even some of the southeast asian domestic driven economies philippines and so some of the investors told us one key reason is because of the good fund flow into the chinese credits um some a large part of it i would say is your chinese accounts but also we are seeing increased regional investors increasing their allocation to china so past two years most of the clients are talking about underweight or entirely avoid china because of macro policy concerns but over the past 12 months i would see i see more and more regional investors as well as some of the global investors adjusting their application to china credits from underweight marketway and some of them are even overweight china high yield so i think this is the mentality that people do want to chase the winners and they do have this mentality of fear of missing out and some of the clients are also talking about if u.s exceptionalism is no longer the case and they want to have some catch in this like no medium to long-term growth trend and they maybe want to have some exposure to china credits in terms of the trade war i think most of asian clients view china macro are still resilient the positive factors they cited is chinese um the chinese companies they don't rely on us for imports as much as some of the u.s companies would be relying on chinese imports and some still hope for big policy stimulus both from the monetary and fiscal front even though some clients are mentioning because china is looking quite resilient maybe the government will try to delay the big stimulus until absolutely necessary um of course still clients voice out some of the concerns medium medium to long-term um so this is about the shocks to the labor market coming from as well as smes and especially those in export oriented sectors deflationary pressure from the domestic sale for goods intended for exports right now china is asking a lot of exporters to divert their production towards the domestic market that's probably going to put more pressure on inflation on the deflationary pressure and um some are also concerned about the u.s forcing a coordinated tariff among the dm markets to block chinese exports and i guess that's why china is also sending diplomats to most of the asian countries to europe to talk about some bilateral trade deals and also there's concerns about escalation beyond the trade war especially when it talks about securities trading restrictions of the chinese adrs or even some of the you know us listed um china companies with battle bonds outstanding in markets yeah so you know as we're recording this we're seeing some headlines that scott baston is going to open trade talks with china is is there a reason to be optimistic like is there a clear way through or are we just in gridlock for a period of time like does china first of all does china have an end game in mind because i can't really figure out what the us end game is to be honest and so i'd be curious if there's kind of view of you in asia and like what what the plan is here and also is china willing to push that plan forward or is it going to take a lot more from the us administration yeah i think it's a bit hard to gauge given she is also meeting putin on wednesday so i'm not exactly sure if any meetings between the government officials there are an indication that we are going to see a trade deal getting pushed through i think right now china is standing quite firm in terms of not really giving up a lot of their positions in the trade negotiation with the us and the us media is reporting quite different contacts versus what the chinese media is reporting so what i could see from the actual media is still china is standing firm will not yield to the us pressure and it is still calling for you know a collaboration between the emerging markets to do more bilateral trades between them instead of yielding to the us and a lot of our Asian credit investors also think that this should be the strategy that china for china to adopt because there's just really not very visible trade talk pass between us and china if one party is just showing a weakness in this negotiation so i think most of the clients don't expect a trade deal to be done over the next few months some really think it will be two to three years if not longer i guess that's why people are starting to position in china credits because you are likely to see quite divergent performance of the two countries and their assets and then clients want to have some exposure in both countries yeah absolutely i mean if this is going to be a two to three year standoff that has some serious implications for the us for sure and it seems that the perception is china has a lot of ability to stimulate from the fiscal monetary side whereas the us is perceived at least right now to be a bit more limited in actions that they can take and also the us midterm elections will be here before we know it and that will depending on how everything has gone and what has actually unfolded in the hard economic data could usher in yet another change which is going to make me feel a little bit crazy but you know this is the things that i really enjoy doing trying to manage all this volatility and figure out what's going to happen next so to wrap up in asia credits post the april sell-off are there any new investors kind of taking a look at the markets and thinking that this might be a place of opportunity yeah we do see an increased participation of credit hedge funds both the regional ones and global ones as well as some of the distressed investors in asian credits most of them are thinking because of the tariff and because of some of the high volatility that will be there will be market dislocations and then there will be trading opportunities and uh the sectors are interested in is one of them is high china industrial names hong kong property for sure and especially names like newer development and some of the smaller cr names indonesia high-yield corporates and mongolia credits including mongolian mining some of mongolia financials as well as the high-yield japan and australian credits so these are the areas of higher interest for the distressed investors all right delina i think that we had a really great recap of your trip i think that you probably should get some rest although you look fresh it looks like nothing has happened my most important question did you gamble at all in macau oh i didn't really do that but our primary macau gaming analyst they did a heated do a bit i think um interesting fact is we went to nine casinos and all of them were really full there was really good food traffic i think it was because it's the golden week holiday so it feels like mel and chinese visitors are still in macau they're still gambling maybe just to gamble their way out of all the craziness and some of the hotel rooms are fully booked so that is something good to hear for the leisure sector yeah great to hear for the leisure sector especially as leisure has just gotten kind of creamed in the recent market volatility in the us ig and high yield markets especially juliana thank you as always for joining me this was a really interesting and super helpful conversation and trying to assess just where we stand globally and where that demand for u.s fixed income will or will not be coming from in the near term if any listeners have follow-up questions for zelena you can always reach out to her on the credit sites websites or if you're not a subscriber you can reach out to our sales team and they can help get you set up with maybe some trial access zelena thank you so much thanks we need credit sites disclaimer all references correspond to the date of this recording this podcast should not be copied distributed or reproduced in whole board in part and the credit sites nor its affiliates 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