Peering into 2019
Much of what happens in Asia in the next 12 months will depend on China’s ability to stabilize the slowdown in its economy that is now forecast to be the slowest since 1990. The rest of the region, ho
1 Feb 2019 | Daniel Yu
For investors, the good news is 2018 is behind us. The bad news? 2019 is just getting underway. If you are a movie buff, what to expect in the coming 12 months offer plenty of choices. If you are a fan of “Game of Thrones”, winter is coming, the motto of House Stark is it. If you are a baby boomer and follows Mel Gibson, it would be the 1982 movie “The Year of Living Dangerously” or perhaps “The Big Chill”, a 1983 movie with the tagline, “in a cold world you need your friends to keep you warm”.
Why so much pessimism, you might ask. One reason is the contrasting fortunes between 2018 and the recent past. And what a difference a year makes. Following stellar double-digit returns in 2017, last year was many investors’ annus horribilis. In fixed income, the JACI (JPMorgan Asia Credit Index) Composite, which tracks Asia dollar bonds, returned -4.49% to 20 December 2018. Spreads on Asia high-grade widened 48bp to 206bp while Asia high-yield saw spreads move 164bp to 620bp, according to Nikko Asset Management.
Investing in equities similarly has not paid off. The S&P 500 closed out 2018 down 6.2% with Asian markets taking the brunt of the sell-off including the China CSI 300, down 27%, Hong Kong’s Hang Seng Index closed 13.6% lower, and Thailand’s SET Index was 10.8% below 2017.
The strength of the US dollar was relentless all throughout the year. The weakness in emerging-market currencies spared no one. In Asia, central banks acted swiftly raising interest rates multiple times. Hardest-hit currencies include the Indian rupee and the Indonesian rupiah. Interestingly, the Thai baht was the least affected. Even so, the Bank of Thailand moved to raise its policy rate by 25bp in December 2018, the first time in more than seven years.
Activity in the capital markets reflected much of the challenges of 2018. Total volume of Asia dollar bonds (G3) was US$240.34 billion as at November 15 2018, according to Refinitiv figures, down 16% from US$286.11 billion in the same period a year ago. Although they continue to account for the lion share of activity, Chinese issuers’ activity dipped to US$109.87 billion from US$139.25 billion during the same period, a decline of 21%. The drop was more pronounced in the high-yield bond market – a space dominated by Chinese property companies – as their issuance plunged by 43.6% to US$19.01 billion, from US$33.70 billion in 2017.
Despite some of the most exciting new-economy companies to surface in Hong Kong since the NYSE-listing of Alibaba in September 2014, the performance of IPOs in 2018 was at best tepid. Xiaomi, best known for its handphones, came to the market at HK$17 (US$2.18) per share and closed the year at nearly 23% below offer price; e-commerce platform, Meituan Dianping closed the year at 36% below its IPO price. Away from technology, hotpot restaurant chain Haidilao International, fared somewhat better with its year-end price down by 3.6% while infrastructure company, China Tower Corp surprised on the upside boasting a positive return of 17.5% ahead of its IPO price.
Elsewhere in the region, one market that attracted a lot of attention in 2018 was Vietnam, which was a favourite destination, attracting increasing foreign direct investment in the past years. Its IPO market, for instance, recorded a higher volume of US$2.28 billion as at November 30 2018 compared with just US$859.7 million in the same period of 2017.
One deal that defined this market was the US$1.35 billion IPO for Vinhomes Joint Stock Company, which was priced at the top end of the indicative range of between 110,500 dong and 114,700 dong. Ahead of the initial equity offering, Singapore sovereign wealth fund GIC came in as a pre-IPO investor and purchased a 7.08% stake in Vinhomes from existing shareholders for US$853 million.
Indonesia was another market that also saw an increased level of activity in the IPO market this year, with a volume of about US$1.12 billion, against US$553.2 million last year. The performances in Vietnam and Indonesia were in contrast to the declines exhibited in Malaysia, the Philippines, Singapore and Thailand in Southeast Asia.
Overall, IPO volume was a step higher than the previous year with total funds raised touching US$76.11 billion as of November 30 2018 from US$75.79 billion a year earlier based on data from Refinitiv. Like the bond market, China drove volume with a market share of 77.4% accounting for US$58.89 billion worth of IPOs, up from the US$44.09 billion in 2017.
Much of the worry for 2019 revolves around the uncertainty of the China-US trade war, the slowing economies – China is set to be growing at 6%, the slowest since 1990 – and the impact on corporate balance sheet. A survey of fund managers in December 2018 by Bank of America Merrill Lynch indicates that corporates are expected to take a cautious stance. Most expect cash flow to be set aside to improve the balance sheet with only one in three investors expecting corporates to fund additional capex.
Fewer investors expect a full-blown recession. In his latest analysis, Mark Dowding, co-head of developed markets at BlueBay Asset Management, relates that recession is not currently on the cards. “We continue to attach ourselves to the Fed narrative that economic cycles don’t die of old age, they roll over when policy becomes too restrictive.” He states further that while financial conditions have tightened in 2018, they remain at the average for the past five years and at a more accommodative level than was the case when the Fed started hiking at the end of 2015.
Another reason suggested is the Fed’s recent more dovish view with Jay Powell, chairman of the Fed suggesting his willingness to finetune rate hikes on consideration of market conditions. The debate now is on the number of rate hikes likely in 2019 earlier forecast to be at three to the more optimistic view that Fed rate hike in 2019 could be limited to just one due to the macro head winds.
With somewhat more benign conditions, issuers in Asia raced to tap the offshore bond market starting with the Republic of the Philippines (RoP), which came to the market on January 7 with a US$1.5 billion offering. The standalone 10-year deal launched without a liability management exercise, was US SEC-registered and priced at 99.736% with a coupon of 3.75% to offer a yield of 3.782%. This was equivalent to a spread of 110bp over the US treasuries, or 20bp tighter than the initial price guidance of 130bp.
RoP, however, had to pay a new-issue premium in the low double-digit range based on the most relevant comparable with its outstanding 2028 bonds, which was quoted at a G-spread of 94bp. The latest bonds traded up in the secondary market and were quoted at 100.05% in the afternoon of January 8. A number of Chinese property developers also joined in the queue launching a succession of deals. Names such as Greenland Holdings, Zhenro Properties, China Aoyuan Group, Yuzhou Properties, Future Land, Sunac China Holdings, Road King Infrastructure, China SCE Property and Powerlong Real Estate Holdings succeeded to raise a total of US$1.5 billion at significantly lower coupon than what they had to pay as 2018 came to a close. For many, when the window opens, it is time to get back especially given the volume of refinancing ahead.
The most notable was China Evergrande Group, which raised US$3 billion on January 23, the largest high-yield bond at the time. The deal was a reopening of existing bonds worth US$2.1 billion. Like the RoP, Evergrande needed to step up with the 2020 bonds at 8.25%, which was 125bp higher, the 2021 bonds with a yield of 9.5%, 325bp more and the 2022 tranche with a yield of 10.5%, higher by 225bp.
The Asian Development Bank was another issuer to race out the starting gates, pricing a US$3.5 billion, 5-year global benchmark bond. ADB’s issue carried a coupon of 2.625% and was priced at 99.498% to yield 14.9bp over the 2.625% US treasury notes due December 2023. “We watched as the first wave of sovereigns, supranationals, and agencies supply was well absorbed by the market and secondary marks tightened steadily reflecting solid performance,” shares Pierre Van Peteghem, treasurer at the bank. “ADB’s decision to go out was duly rewarded with a strong orderbook that held together at the tightest pricing for a USD 5-year global benchmark bond so far in 2019.”
The flurry of deals that started 2019 has given hope that the coming 12 months may not be as dire as predicted. While 2018 felt much like pulling teeth as how one banker describes it, 2019 could be a year of surprise on the upside for emerging markets if conditions remain sanguine. For Asia, much depends on China and how the slowdown impacts the rest of region.
According to Fitch Ratings data, 2018 was the worst year for China onshore bond defaults both in terms of the number of issues that defaulted and the principal amount of bonds in default. The rating agency shares that 45 corporates defaulted on 117 bonds with a total principal amount of 110.5 billion yuan (US$16.3 billion). The large majority, around 86.7%, were by private enterprises.
How China fares, therefore, would have a material bearing on the rest of Asia. “Remember that exports to China contributed more to growth in neighbouring economies than shipments to the US and EU over the past year,” points out Frederic Neumann, co-head of Asia Economics Research at HSBC. “Moreover, by some measures, over a quarter of global GDP growth is currently driven by China. That means demand elsewhere is also vulnerable to any lull in mainland purchases – Europe’s economies already appear to be slowing.”
Neumann thinks that policy measures in China should deliver a stabilization in growth. “Amid tightening liquidity globally and increasingly soggy growth in the West, economies across Asia will need to revive demand closer to home as well. Extra fiscal spending helps, especially on infrastructure, but is still falling short across much of Asean and South Asia.”