Back to School: The Credit Market Outlook 2H10

- Keep Calm and Carry On "We are constructive on corporate credit globally, and expect he Asian risk premium over Developed markets to gradually compress. A US growth lowdown to 2% but short of a a double dip, although raising the probability of tail-risks, will eep DM credit in a relative ‘sweet spot’ of low rates and a lid on credit-unfriendly actions, while valuations and liquidity support Asia in spite of ‘equity-friendly’ growth rates."
- Technicals and Valuations support Asia "We expect Asian credit spreads to ncreasingly converge with DM spreads, driven by asset allocation trends, healthy balance heet liquidity and an increasingly reduced emphasis on liquidity premiums."
- The Future of Asian Credit Markets "The Asian credit markets are in the midst of a secular change. Both the demand side and supply side are growing much faster than the historical norm. We expect the next five years to be very different to the past five years and expect the non-Financial credit market in Asia to quadruple in 2015. ."
- Key themes in Asia:
• "Prefer HY over IG, due to unusually steep credit quality curves, shrinking all- in yields, unusually strong corporate liquidity profiles and a supportive cyclical backdrop;
• Prefer China Property within Asian HY, powered by valuations, a policy cycle increasingly on hold and an improving Chinese credit cycle ; and
• Prefer Bank Capital, as regulatory change represents a powerful, credit friendly de-risking trend and valuations still look compelling."
• "Cautious on Australian banks, due to concerns about significant funding needs for 2010-2011 and increasingly bubble-like housing valuations."
• "Uncomfortable with Quasi-sovereign valuations. Global quasi-sovereign valuations are increasingly stretched and Asia is richer than CEMEEA and LATAM. Our Quasi-sovereign score provides guidance."

Morgan Stanley Asia Credit Strategy 20100831

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