Asian fixed income Rare value in an uncertain world February 216
Content Asian fixed income returns in context Macro situation in Asia Market overview Key considerations in Asian fixed income 2
Asian fixed income returns in context 214 215 216 (to 22 Feb) Yield US Treasury 6.%.8% 2.2% 1.7% US Corporates 7.5% -.6%.4% 3.6% US High Yield 2.5% -4.6% -1.6% 9.4% Euro Govts 13.2% 1.6% 2.%.5% Euro Corporates 8.3% -.4%.6% 1.3% Euro High Yield 5.5%.8% -1.1% 5.7% Asian Corporates 8.% 2.8%.9% 5.2% Asian High Yield 6.1% 5.2% -.4% 8.3% Asian Local Currency Bonds (in USD) 4.4% -3.2% 1.2% 3.7% Offshore RMB Bonds (in USD).4% -2.3% -1.4% 5.6% Onshore RMB Bonds (in USD) 7.6% 3.5%.% 3.2% Indian bonds (in USD) 13.9% 3.4% -3.2% 8.1% Source: BoA Indices: US Treasury, US Corporates, US High Yield, Euro Govts, Euro Corporates, Euro High Yield; JPMorgan Asia Credit Corporate Index: Asian Corporates, Asian High Yield; HSBC Asian Local Bond Index: Asian Local Currency Bonds, offshore RMB bonds; ChinaBond indices: onshore RMB bonds. Data as of 22 February 216 Data shown is for illustrative purposes only and does not constitute to investment recommendation to buy or sell in the above-mentioned asset classes 3
Macro situation in Asia
Asia is in a better position to withstand capital outflows Asia will likely continue to see increased capital-flow volatility on the back of a Fed rate hiking cycle and FX volatility/rmb risks Improved basic balance provide some buffers against the risk of capital outflows However, countries with heavy reliance on foreign funding and low FX reserves buffers could be more vulnerable Signs of stabilising FX reserves (ex China) as central banks scaled back FX intervention USDbn USDtrn 45 4.5 4 4. 35 3.5 3 3. 25 2.5 2 2. 15 1.5 1 1. 5.5. 1-23 1-26 1-29 1-212 1-215 HK IN ID KR MY PH SG TW TH CN, rhs Basic balance (current account balance + net FDI inflows) has improved or remained in surplus in most countries % of GDP (4qtr-avg) % 2 6 15 1 5 Foreign holding of local government bonds is relatively high in Indonesia and Malaysia 5 4 3 2 1-5 Q1 1Q7 Q1 1Q8 Q1 1Q9 1Q11 1Q1111 1Q1212 1Q1313 1Q1414 1Q15 15 CH IN ID KR MY PH TW TH Source: CEIC, HSBC Global Asset Management, data as of January 216 1-27 1-28 1-29 1-21 1-211 1-212 1-213 1-214 1-215 KR TH MY (MGS and MTBs) MY (MGS, MTBs & GIIs) ID 5
External fundamentals generally healthy Most countries now run current account surpluses vs mostly in deficits prior to the Asian financial crisis (AFC) % of GDP Months 15 FX reserves import cover improved from their AFC levels 25 1 2 5 15 1-5 -1 5-15 CN HK IN ID KR MY PH TW TH VN CN IN ID KR MY PH SG TW TH 1994 1995 1996 212 213 214 1995 1996 1997 212 213 214 215* 1 Note: 1. January-July average for 215 Source: CEIC, HSBC Global Asset Management, data as of September 215 6
For all the concerns about Chinese growth, China and India seem to have more solid foundations than other large economies BRICS et al GDP 215 GDP 216 Unemployment CPI Budget balance C/A balance 1 yr bonds 12mo USD Brazil -2.8% -1.2% 7.6% 8.9% -6.% -3.8% 16.2% -34.6% Russia -3.9% -.4% 5.2% 15.% -2.8% 5.5% 9.6% -17.9% India 7.3% 7.6% 4.9% 5.% -3.8% -1.1% 7.7% -6.7% China 6.9% 6.4% 4.1% 1.6% -2.7% 3.1% 2.8% -5.6% South Africa 1.5% 1.8% 25.5% 4.7% -3.8% -4.3% 9.5% -31.2% Malaysia 5.4% 6.1% 3.2% 2.5% -4.% 2.5% 4.2% -19.1% Indonesia 4.7% 5.% 6.2% 6.4% -2.% -2.5% 8.7% -9.7% Turkey 2.9% 3.% 9.8% 7.5% -1.6% -4.9% 1.9% -24.3% Note: 1. Countries included are those that are included in the GBI-EM Broad Index as of 31 October 214 Source: JP Morgan Morgan Markets, IMF, World Economic Outlook Database October 214. Table Bloomberg 11.1.16 7
Asian currencies have been appreciating against global currencies Asian currencies in REER terms (rebased to 1 on 31 Dec 213) 12 115 11 15 1 95 9 85 8 12-213 1-214 2-214 3-214 4-214 5-214 6-214 7-214 8-214 9-214 1-214 11-214 12-214 1-215 2-215 3-215 4-215 5-215 6-215 7-215 8-215 9-215 1-215 11-215 China Taiwan Hong Kong India Indonesia Korea Malaysia Philippines Singapore Thailand United States Source: BIS, HSBC Global Asset Management, data as of December 215 8
RMB expected to remain stable against trade weighted index China has pledged to monitor newly adopted Trade Weighted Index (TWI) as reference for daily currency fixing rate USD/CNY could see greater volatility, while the RMB against TWI is expected to remain relatively stable RMB strengthens versus EM currencies Currency weighting in TWI Rebased, Aug 215 = 1 115 11 Appreciation 15 1 95 9 Depreciation 85 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 vs USD vs EUR vs JPY CNY (CFETS weightings) vs a basket of EM currencies USD/CNY (26%) EUR/CNY (21%) JPY/CNY (15%) HKD/CNY (7%) AUD/CNY (6%) CNY/MYR (5%) CNY/RUB (4%) GBP/CNY (4%) SGD/CNY (4%) CNY/THB (3%) CAD/CNY (3%) CHF/CNY (2%) NZD/CNY (1%) 9
Market overview
China Korea Hong Kong Indonesia India Philippines Singapore Malaysia Thailand Sri Lanka Pakistan China Korea India Malaysia Thailand Singapore Hong Kong Indonesia Philippines Overview of Asian fixed income Size and yields of the Asian credit and currency bond markets The market can be broadly split in two USD Asian credit market of approx USD623 billion Local currency bond market of approx USD1 trillion Including China, South Korea, India, Hong Kong, Thailand, Malaysia, Singapore, Indonesia, Philippines and some other frontier markets Asian USD credit markets 1 Asian local currency bond markets 2 (USDbn) 3 (%) 8 (USDbn) 7, % 9 25 2 15 1 5 7 6 5 4 3 2 1 6, 5, 4, 3, 2, 1, 8 7 6 5 4 3 2 1 Size of Asian USD credit market (LHS) Yield (RHS) Size of Asian local currency bond market (LHS) 1-year Government Yields (RHS) Notes: 1. Source: JPMorgan Asia Credit Index, as of 31 December 215. 2. Source: AsiaBondsOnline; market sizes as of September 215; Yield numbers as of 27 January 216 Data shown is for illustrative purposes only and does not constitute any investment recommendation to buy or sell in the above-mentioned countries and asset classes. 11
Key considerations in Asian fixed income
Key considerations in Asian fixed income Quality Price Underrepresentation Diversification Future developments Resilience Capturing the theme Single market opportunities 13
Japan Italy US Singapore Spain France UK Germany India Malaysia Thailand China Taiwan Korea Philippines Indonesia Hong Kong Quality Asian (ex Japan) institutions are less indebted than those in other parts of the world Participating in generally higher growth economies should enable Asian institutions to service their debts more easily, all other things being equal Government debt to GDP % 3 Asian GDP growth vs rest of the World % 6 25 5 2 4 15 3 1 2 5 1 Asia ex-japan North America Latin America European Union Asia (ex-japan) Non-Asia 214 215e 216e 217e Source: IMF World Economic Outlook, Bloomberg, July 215. Any forecast, projection or target contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only 14
Indonesia India Philippines Malaysia China Thailand Singapore Korea US UK Spain Hong Kong Italy France Germany Japan Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Price Yields in Asia tend to be higher than in US, Japanese and European markets Selected 1-year government bond yields Yield (%) 9 8 7 6 5 4 3 2 1 Global investment grade bond spread Spreads 3 25 2 15 1 5 US IG Corp Asia IG Corp EU IG Corp Source: Bloomberg, 27 January 216 15
Asia is underrepresented in Global Bond Indices Asia accounts for about 5% of the world s population Asia accounts for about 35% of the world s GDP Asia accounts for less than 1% of Global Bond Indices 1 Rest of the World Asia Note: 1. Citigroup World Government Bond Index Source: IMF, Citigroup, data as of October 215 16
Diversification Cumulative return (in USD)¹ Index 1 = 1% HSBC ALBI + 1% HSBC ADBI + 8% BGA Index 2 = 15% HSBC ALBI + 15% HSBC ADBI + 7% BGA Risk and return 25 26 27 28 29 21 211 212 213 214 Note: 1. The effects of taxes have not been adjusted in this analysis Source: Bloomberg, June 215 H1 215 Cum return 1-year average Volatity Index 1-3.5% 7.% 9.1% 3.8% 8.1% 6.3% 5.6% 5.2% -2.8% 1.5% -2.5% 43.6% 4.% 4.7% Index 2-2.9% 7.3% 8.9% 3.2% 8.7% 6.7% 5.6% 5.7% -2.9% 2.% -2.2% 46.9% 4.2% 4.5% BGA -4.5% 6.6% 9.5% 4.8% 6.9% 5.5% 5.6% 4.3% -2.6%.6% -3.1% 38.% 3.7% 5.3% 17
Return characteristics of bond markets Stress scenarios Simulated scenario returns (in local currency) over next 12 months Asset class Duration Yield Current quality Simulated return if +1% govt yields Simulated return if +2% govt yields Simulated return if 1bp spread widening Simulated return if 2bp spread widening US Treasury 6.24 1.53% AA+ -2.66% -7.9% 2.58% 2.58% Euro Government 7.16.65% AA+ -4.89% -11.5% 1.27% 1.27% US Corporate 6.71 3.59% BBB -.98% -6.69% -.98% -6.69% Euro Corporate 4.94 1.45% BBB -2.1% -6.4% -2.1% -6.4% Onshore RMB Bond 3.83 3.1% BBB+.84% -1.99% 3.1% 2.53% Offshore RMB Bond 2.58 5.32% A- 1 3.74% 2.16% 4.6% 2.79% Asia Corporate (USD) 4.7 4.47% BBB 2.1% -1.6% 2.1% -1.6% India Government 6.2 7.55% 2 BBB- 2.53% -2.49% 7.55% 7.55% Notes: Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only. Simulations are not indicative of future performance. Actual events, conditions and performance may differ materially from assumptions and simulations 1. Based on HSBC Global Asset Management Internal Ratings where bonds are unrated by major rating agencies 2. Including estimate for withholding tax on coupons for foreign investors 3. For illustrative purpose only and does not constitute investment advice Source: Bloomberg; HSBC Global Asset Management, 19 January 215 18
Future developments Forecast of local currency bond market size using GDP forecast and historical 5-yr avg growth rate Forecast of USD Asian bond market size using GDP forecast and historical 5-yr avg growth rate USDbn 214 214 investable 22f % change 214 investable to 22f USDbn 214 22f % change China 5,192 25 1,1 3,94% Indonesia 123 123 172 39% Korea 1,73 1,73 2,82 65% Malaysia 316 316 573 82% Philippines 14 14 19 83% Hong Kong 194 194 31 6% Singapore 241 241 386 6% Thailand 281 281 444 58% Vietnam 41 41 122 199% India 1,86 81 2,112 2,58% Total 9,281 3,334 17,211 416% China 195.8 381. 95% Hong Kong 69.5 145.2 19% India 49.5 219.8 344% Indonesia 55.4 118. 113% Malaysia 17.6 25.1 43% Pakistan 3.6 12.6 246% Philippines 42. 7.7 68% Singapore 24.7 32.5 31% South Korea 78.3 118.1 51% Sri Lanka 7.1 45.6 545% Taiwan 2.9 8.8 21% Thailand 15.6 65.7 322% Vietnam 2.4 8.2 247% Total 564.5 1,251.2 122% Source: HSBC Global Asset Management, July 215. Forecasts in the first table are based on 5 year historical growth rate and IMF forecast for nominal GDP growth, assuming broadly stable exchange rates. China 214 Investable based on sum of QFII and RQFII quotas available for bond investment and an estimate of CIBM quotas for Central Banks and Insurance (not publically available). India 214 Investible based on FPI domestic bond market quota. Current market sizes taken from Asian Development Bank except India taken from HSBC research. Forecasts in the second table are based on JPMorgan Asian Credit Index and 5 year historical growth rates and IMF forecast for nominal GDP growth, except China. Smaller countries excluded. The forecasts are provided for illustrative purpose only and are not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts 19
Capturing the theme Asian fixed income universe is made up of the countries which are set to contribute to the shift of focus in the world economy from west to east The financial markets will provide new and valuable opportunities for investors in the coming years 2
Core yields in China are high compared to international markets Compared to the 1 year bonds in the top 1 largest bond markets, China s is highest Amongst peers with same credit rating (AA- or Aa3), China s yield is high 1 year government bond yields of world s largest bond markets 1 year government bond yields of selected markets which are rated AA- or Aa3 Yield (%) Yield (%) 4.5 4.5 4 4 3.5 3.5 3 3 2.5 2.5 2 2 1.5 1.5 1 1.5.5 China China (onshore) (offshore) Italy Spain UK US Belgium France Holland Belgium China (onshore) China (offshore) Chile Czech Republic Japan South Korea Taiwan Source: Bloomberg, HSBC, data as of 14 January 216 INTERNAL 21 - For Professional Investors only. Not for further distribution.
May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Limited ratings and pricing differentiation in the onshore RMB credit market Over 98% of the market is rated AA or above by local credit agencies, less than 2% is rated AA- or below Published credit ratings are not useful for differentiating between different quality bonds An increasing number of credit default events should continue to drive improved pricing differentiation in the market Credit quality breakdown 1 Onshore corporate bond spreads AAA (61.9%) 3 25 Spreads between low and high quality bonds start to widen as credit event cases increase AA+ (19.%) 2 AA (17.9%) 15 AA- (1.%) 1 A+ (.2%) 5 A & Below (.1%) 3Y AA Corporate Bond Yields - 3Y AAA Corporate Bond Yields Note: 1. The rating mentioned above refers to the local credit rating in China. The rating criteria and methodology used by Chinese local rating agencies may be different from those adapted by most of the established international credit rating agencies. Therefore, the Chinese local credit rating system may not provide an equivalent standard for comparison with securities rated by international credit rating agencies Source: ChinaBond, LHS credit quality breakdown as of 31 December 215, RHS spreads as of 13 January 216 INTERNAL 22 - For Professional Investors only. Not for further distribution.
Mapping local credit ratings to international equivalents (Unofficial mapping for reference only) China onshore bonds are mainly rated by local rating agencies, which have difference standards to international ones Local rating agencies eg China Lianhe Credit Rating, Dagong Global Credit Rating, Peng Yuan Credit Rating, etc If we try to map the local ratings to international one by using China s sovereign rating: S&P assigned AA- vs Local rating agencies rated AAA to Chinese government Reference rating conversion table¹ Local rating A+ and below A A - A A A A + A A A International rating (S&P) AAA AA+ AA AA- Sovereign rating A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC Note: 1. The table is provided for discussion purposes only. There is no official mapping to convert local rating into international rating. The rating criteria and methodology used by Chinese local rating agencies may differ from those adopted by established international credit rating agencies. Therefore, the Chinese local credit rating system may not provide an equivalent standard for comparison with securities rated by international credit rating agencies Source: HSBC Global Asset Management, December 215 INTERNAL 23 - For Professional Investors only. Not for further distribution.
Offshore RMB bond market often offers higher yields Offshore RMB bonds are on average yielding 5.5%, while average duration is only 2.6 years Bonds denominated in CNH tend to have higher yields, compared to bonds in other major currencies such as USD and EUR, even when comparing the same issuer with very similar tenor Company 1: Total (bond issued on 12 Sep 213) Same bond in different currencies Yield (%) on 25 Jan 216 Total 3.75% 9/24/218 (CNH) 4.95 Total 2.125% 8/1/218 (USD) 2.18 Total 4.875% 1/28/219 (EUR).22 Company 2: BPLN (bond issued on 2 Oct 213) Same bond in different currencies Yield (%) on 25 Jan 216 BPLN 3.95% 1/8/218 (CNH) 5.5 BPLN 2.241% 9/26/218 (USD) 2.36 BPLN 2.994% 2/18/219 (EUR).52 Source: HSBC Global Asset Management; Bloomberg, data as at 25 January 216. The data presented is for information and illustration purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy INTERNAL 24 - For Professional Investors only. Not for further distribution.
Yields in the offshore market are attractive on a risk adjusted basis Duration of the market is only around 2.6 years Therefore the duration-adjusted yield is attractive Yield comparison Asian hard currency bond vs offshore RMB bond % 6. 5. 4. 3. 2. 1.. Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 HSBC Asian US Dollar Bond Index BofA Merrill Lynch Euro Corporate Index BofA Merrill Lynch US Corporate Index HSBC Offshore RMB Bond Index Historical yield (duration adjusted) 2. 1.5 1..5. Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 HSBC Asian US Dollar Bond Index BofA Merrill Lynch Euro Corporate Index BofA Merrill Lynch US Corporate Index HSBC Offshore RMB Bond Index Source: HSBC Global Asset Management; Bloomberg, data as of 29 December 215 INTERNAL 25 - For Professional Investors only. Not for further distribution.
South Africa Indonesia India Mexico Philippines Malaysia Hungary China Thailand US UK Spain Germany FY FY 1 FY 2 FY 3 FY 4 FY 5 FY 6 FY 7 FY 8 FY 9 FY 1 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 Indian bonds High yield Improving budget Oil boost Improving current account Improved currency performance Central government fiscal deficit % of GDP 7. 6. 6. 6. 5.2 5.5 5.7 5. 4.3 3.9 4. 4. 3.3 3. 2.5 6.5 4.8 5.7 Govt s fiscal consolidation path 4.8 4.5 4.1 3.9 3.5 3. 2. 1.. Fiscal deficit (as per new consolidation path) Old fiscal consolidation path Selected 1 year government bond yields Current account deficit Yield (%) 1 9 8 7 6 5 4 3 2 1 7.8% % of GDP -1-2 -3-4 -5 Expected -6 29 21 211 212 213 214 215 216 217 218 Note: Any forecasts, projections or targets contained in this presentation is for information purpose only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purpose only Source: Budget documents, CEIC, HSBC, as of 28 January 216 26
Conclusions Asian fixed income has provided decent returns during the latest bout of risk aversion Asian currencies generally have good fundamentals, but progress of USD is key Asian fixed income has enduring qualities with the potential to outperform Interesting niche opportunities are worth consideration 27
Important Information
Key risks Investor should be reminded that investment in some of the developing Asian countries may involve special considerations and risks. Political changes, government regulation, social instability or diplomatic development, etc could affect adversely the economies of such countries or the value of the investment Change of interest rate may affect the value of the investments. Bonds and other fixed income securities are more susceptible to fluctuation in interest rate and may fall in value if interest rates change The assets and liabilities of the investments may be denominated in Asian currencies which is different from the base currency of the investments. Therefore, the investments maybe affected favourably or unfavourably by exchange control regulation or changes in the exchange rates between the base currency and other currencies The investments may have exposure in credit risk whereby investments in non-investment grade debt obligations involves a high amount of risk. An issuer suffering an adverse change in its financial condition could lower the credit quality of a security, leading to greater price volatility of the security Investments made may have exposure in financial derivative instruments, such as futures, forwards and swaps, etc. Investments in financial derivative instruments may involve a greater degree of risk than in case with conventional securities and may subject to liquidity and counterparty risks Currency movement and market condition may affect the value of investments 29
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