Citi back on top in fixed-income research

The US bank reclaims the driverÆs seat in our annual poll; S&P never goes out of style, and the outlook for Asian fixed income exposure remains strong.
Once again, over the fall FinanceAsia conducted its annual fixed-income research poll, which is designed to reflect the outlook of AsiaÆs fixed-income investor community.

The poll aims to analyse market participantsÆ views on the Asian markets, views on credit-rating agencies, as well providing a forum to vote for the best borrowers and, of course, the banks that are best at producing credit research.

This year Citi returns to the top spot. It seems that two years ago, when Citi emailed clients to tell them that its fixed income research model had changed, there was no reason to worry. Of course, people initially were concerned; last year Citi slipped from its lead position to the number two rank, behind UBS. But after a year of clients becoming comfortable with CitiÆs new system wherein credit-research analysts are now called ôcredit sector specialistsö (this means that the people at Citi are no longer printing research reports or anything that could be construed as ôresearchö by the US regulators), people in the industry voted Citi as the overall winner once again. The American bank scored an aggregate 690 votes to UBSÆs 543 votes. This is a much larger margin than last year, when UBS scored an aggregate vote of 659, versus CitiÆs 624 votes.

The poll indicates that the industry views Citi as leading in most areas û indeed it won five of the six categories that FinanceAsia uses to calculate the composite score (best at regional macroeconomic research, bank and financial sector research, investment grade credit research, sovereign credit research and in credit strategy). UBS took the top spot in best high yield/distressed debt research.

For the past four years, Stephen Cheng of UBS has dominated this poll, but now that he has switched to the trading desk he is no longer an analyst. He received no votes this year û a good sign, as it indicates those polled actually know what they are talking about. Instead, CitiÆs Ivan Lee was voted the best analyst by a fair margin û winning more than double the votes of his nearest competitor, Johanna Chua, who also works at Citi. Edwin Chan of UBS trailed only one vote behind Chua, making it a tight race for second place.

Ratings agenciesÆ popularity saw no surprises this year, with S&P, MoodyÆs and Fitch ranking first, second and third respectively for all categories (sovereign, bank, corporate and structured finance investments). Regardless of the US credit crisis this year, many analysts, including top analyst Lee of Citi, says that ratings agencies are doing a good job in the corporate environment.

As for corporations, Hutchinson Whampoa handily won the category of most professional corporate borrower again this year, with Hong KongÆs Li & Fung and Petronas Malaysia tying for second place. The PhilippinesÆ PLDT won again for best non-investment grade corporate borrower.

The outlook for Asian fixed-income exposure remains strong, with 64% of respondents stating they would increase their exposure, 30% maintaining the status quo and only 6% planning to decrease the exposure to Asian bonds. The contrast in results was not so great in the high-yield market, with 47% of respondents planning to increase their exposure to high-yield, 15% intending to decrease and 38% planning to maintain their exposure.

Chan of UBS says, ôThis is in line with our understanding that there is still liquidity waiting on the sidelines which needs to be put to work. Obviously if we look at market liquidity in the second half of 2007 versus the first half, itÆs not as strong because the CDO demand is not there and bank bids are not as strong. However, we believe there is still money thatÆs waiting to be put to work. Real money accounts, for example, did not experience much cash outflow (in some cases there are even inflows) and some funds/desks remained under-invested before the meltdown. But we have asked investors to remain nimble, as there are still road bumps ahead.ö

He goes on to explain that on the high-yield front, investors may be more concerned with the impact of economic weakness, particularly in the United States, on high-yield names. Still, he says, ôwe still expect out-performance of that class in the medium term, driven by the maturity of the market, and we are staying with credits with better fundamentals or positive momentum in their credit profiles.ö

In the popular predictions categories, we asked respondents to assess what countries were most likely to experience an up or downgrade. Of these, only Taiwan fell off the charts (for the better), no longer ranking in the top four for sovereign downgrades.

China, India and Indonesia were voted as the top three nations likely to have a foreign upgrade, with 132, 104 and 96 votes respectively. Thailand, Indonesia and the Philippines, with 66, 51 and 47 votes, were named most likely to receive a downgrade.

Overall, there was a subtle change in respondentsÆ perception of Asian spreads, with 29% voting that spreads will widen in 2008, compared to 33% last year; 40% expecting that they will narrow, compared to 32% last year; and 31% anticipating no change, compared to 35% last year.

UBSÆs Chan explains the results this way: ôWe asked investors to start picking up credits in August following the first discount rate cut by the Fed. We believed that with the Fed becoming more actively involved this was a turning point. And we expect credit spreads to stabililse in the near term. Obviously the follow-through by the Fed in September did more than just stabilise spreads so the response doesnÆt come as a surprise.ö

Asian credit spreads reached a peak in September and have retrenched somewhat since. But they are still far from the tight levels seen in the first half of this year, adds Chan. ôThe relative value picture is similar if we look at it on a spread over US comparison basis, which probably explains the tightening bias in the poll results and the change in perception between this year and last. But still, the proportion among the three groups is rather even, highlighting the lack of a consensus. On one hand we have fundamental issues, especially in the US, that are unlikely to be resolved in the near term. On the other, we still have decent levels of liquidity, which needs to be put to work versus modest supply. We think the battle between fundamentals and technicals will go on for a while. Unless we have further major shocks, we think liquidity will continue to support spreads, if not taking them tighter, in the near term.ö

This story first appeared in the November edition of FinanceAsia.
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