September Outlook: Humpty Dumpty

- "Over the past couple of years, central bankers and politicians around the world have spent trillions of dollars in an effort to restore employment and economic growth. Some traction was made, although the past month has proved to be challenging and perhaps suggests an over-reliance by the global economies on stimulatory measures. Unfortunately, more is likely to required to put the world “back together again” as the risk of a double-dip recession becomes an ever growing possibility. Such a view comes in light of all the recent economic data readings across the US, Europe and Asia turning down at differing speeds. The result is that the Asian credit markets will be challenged for the rest of the year contending with the different speeds, together with an increase in M&A activity. While Asian credit is attractive on a relative value basis (vs. its global peers), the technicals that have supported it in recent months are finally showing signs of fatigue. Going in to September, our strategy across the credit spectrum consists of a shift into lower beta credits. Specifically, we recommend:
HG Corporates: We continue to see value among the AAA credits trickling down to the AA and A space, with limited opportunities in BBB credits.
HG Banks: We continue to think the Australian major banks will call their subordinated debt and therefore offer value. The Basel proposal, if adopted, would likely drive a contraction in Australian major bank subordinated CDS versus senior.
HY Corporates: While we do not see much upside in Chinese property and Indonesian issues on an outright basis, we continue to like selective defensive names as carry trades and see relative value opportunities.
Sovereigns: Indonesia and Philippines cash bonds remain subject to market technicals. Depending on global macro conditions, we could see Malaysia and Vietnam underperform."

Nomura Asia Credit Commentary 20100831

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