CreditSights picks preferred sectors, what to avoid 

CreditSights, an award-winning global credit research provider, has identified key sectors that high-net-worth individuals may look into and what to avoid when recalibrating their bond portfolios.

In a recent webinar organized by Metrobank for clients, Sandra Chow, CFA, Co-Head of Asia Pacific Research at CreditSights, said certain sectors covering US and Asian sovereign bonds may likely outperform.

She said a list of preferred sectors from CreditSights’ US strategy team included large banks, financial services, basic industry, and telecoms for US investment-grade credits. As for US high-yield credits, they have identified energy, healthcare, leisure, telecoms, and transportation.

“Of course, even within these recommendations there is a lot of nuance and differences between certain credits, so for individual company recommendations we would need to have a more detailed discussion,” she said.

“Bumpy landing”

“Our base case assumption is a ‘bumpy landing’ for the US investment grade and high yield markets,” she said. “Under this scenario, we expect the US IG index to tighten to 120 bps (currently 129 bps) and the US high yield to reach 400 bps (currently 435 bps).”

“Within the US IG universe, credit fundamentals remain historically strong, providing a cushion into an economic slowdown,” she added.

China’s recovery is also a major theme in the bond market, but uncertainties remain.

“As always in China, policy direction is key. We think there is strong political will to maintain economic growth and believe the government may even set an economic growth target of above 5%,” she said.

When China’s economy becomes stronger, its monetary policy may begin to tighten. For Sandra, this may start in the second half of 2023.

“Higher onshore rates should support the renminbi (RMB) and might prompt some Chinese issuers to return to the dollar bond markets, as the onshore or offshore funding differential narrows,” she said.

Promising Asian credits

There is a supply drought in Asia credit, excluding Japan. Currently, Asia’s investment-grade credits are trading 20 basis points (bps) wider than those in the US. Asia high-yield credits have decoupled dramatically from US markets since the China property debacle in late 2021.

“The index has rallied a lot since late last year, on increased policy support for the property sector,” said Ms. Chow. “Investor sentiment has pivoted from fear of default, to fear or missing out, or FOMO. Is this justified?”

For Asia investment-grade credits, Philippine sovereigns are among those recommended to clients, aside from Indonesia, Malaysia, and Thailand.

Caveats

“One sector which we would become more cautious on amid the economic recovery are (China’s) LGFVs, or local government financing vehicles. We expect LGFVs’ funding conditions to come under pressure in 2023 due to rising onshore rates, retreating investor demand for LGFV bonds, large maturity walls, the constrained lending capacity of city and rural commercial banks, and shrinking trust loan financing,” she said.

“We do not expect large-scale and disorderly LGFV defaults since containing systemic risk is still the central and local governments’ priority. However, negative headlines could increase over the next 6-12 months as the sector’s funding conditions deteriorate, resulting in a negative feedback loop,” Sandra cautioned.

CreditSights is also not too keen on European credit due to a fundamental outlook hobbled by high inflation and the ensuing rate hikes, as well as headwinds from the European Central Bank’s quantitative tightening, which may help contain inflation.

To learn more about how Metrobank and its credit research partner CreditSights can help you build a resilient bond portfolio, please reach out to your relationship manager or investment specialist.

ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in business journalism and corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes on epic adventures with his family, practices Aikido, and sings in a church choir.