What stood out in FinanceAsia’s Impact of Covid-19 on Credit Markets survey, in partnership with Fitch Ratings, was the cautious optimism that respondents displayed in the midst of the coronavirus pandemic.
While 7% favour a V-shaped recovery over the next three to six months, almost half (45.2%) forecast a U-shaped rebound over the next one to three years, versus the next closest group (25%) who are picking a W-shaped recovery over the same period.
“Currently, uncertainty is very high. Reopening economic risk and further tension between the US and China is still weighing on the market,” said one North Asian asset manager who responded to the survey adding that while they did not expect a V-shaped recovery, they had confidence that it would be either U-shaped or sloping V-shaped.
“We are expecting annual growth rates to rebound in 2021, in some cases quite significantly,” said Stephen Schwartz, head of APAC sovereigns at Fitch Ratings, confirming the broad trend seen in the survey while also underscoring an usually high degree of uncertainty underlying the forecasts.
“V-shaped recoveries in non-financial corporate sectors will be rare, the closest we will get to that will be some sectors in China like homebuilding and a few other policy-driven sectors”, said Buddhika Piyasena, head of APAC corporates. “Most sectors will take a longer time to recover, given impact to households and consumer confidence, with sectors such as travel, lodging and leisure taking much longer than most,” he added.
“The domestic environment will also play an important role in the shape of the recovery of various sectors” he added, highlighting the agency’s more negative view on the Indonesian property sector as compared to that of China as an example. In addition, the risk of a second-wave of infections remains a real risk as economies re-open.”
In China, while he expects growth of just 0.7% this year, that is expected to jump to 7.9% next year. It is a similar story for the US. The economy is expected to contract by 5.6% this year but rebound to growth of around 4% next year.
But much like the respondents to the survey, Schwartz emphasizes that this is not to be seen as a V-shaped recovery.
“We're not expecting GDP levels to recover to pre-crisis levels until late 2021, or even in some cases 2022. So, we're not going to get back to the level of GDP for quite some time, even with those growth rates,” he said.
Survey respondents were more considerably bullish on a China recovery. The majority expected growth of between 2% and 4% this year (60%).
Here Fitch is more cautious. The ratings agency has downgraded its 2020 GDP growth outlook on China over the past month – Schwartz says that it has been taken down from 1.2% to 0.7% on the basis of the weak first-quarter figures released in mid-April, compared with the IMF’s 1.2% growth forecast for China. It is worth noting, however, that in mid-May IMF managing director Kristalina Georgieva, said that it was “very likely” that this could be cut further.
“China's recovery is going to be held back by the very weak external environment. The risks of a second wave of the virus could frustrate trade recovery as well,” Schwartz added.
Cautiously optimistic the outlook for the economy held by respondents might have been, but expectations of issuance were almost bullish.
Issuance has been badly hit by the coronavirus. The volume of bond issuance in Asia-Pacific declined 17% in the first quarter of the year to $395.1 billion, while China DCM volumes slipped 18% to $209.2 billion in the same period, according to Dealogic figures.
Nonetheless, more than a third of respondents (36%) thought that G3 bond issuance would be either be at the same level as last year or down only 10%.
What is significant here is the paper for which investors are looking. Respondents to the survey overwhelmingly favoured paper rated A and above.
“There is quite a segmentation right now. In the sovereign space investment grade countries have seen successful bond issuance. But when you get down into the single B category, they're the ones really struggling with a lack of market access,” said Schwartz.
The survey might have suggested that investors are only looking for A rated bonds, but this caution did not carry through fully into all of paper that respondents were looking to buy. In terms of foreign currency bond allocation, for example, respondents were in favour of emerging markets such as China, India and Indonesia, ahead of developed markets like Japan, Singapore and Hong Kong.
Sign of the lack of risk appetite though, can be discerned in that comparatively few respondents to the survey intended to look at foreign currency bonds in frontier markets like Sri Lanka, Pakistan, Vietnam and Mongolia.
It is a point picked up by Terry Gao, head of APAC international public finance at Fitch Ratings. Although respondents to the survey said that they were considering gaining exposure to high-yield names in China, India and Indonesia, he is doubtful how far this can be pushed.
“Before Covid-19 these three markets saw a big growth of high-yield issuers, but it is unlikely that there will be many high-yield names because appetite from investors is moving from high-yield to investment grade,” he said.
“From the issuer perspective, the narrowing down of the spread between onshore and offshore bond markets (e.g. China) also gives public sector issuers less incentive to tap the offshore market,” he added.
“While investment-grade companies have dominated cross border issuances in Asia in recent months, we are starting to see some high-yield issuances as well, but they are all repeat issuers”, said Piyasena of Fitch Ratings’ corporates team. Many corporate high yield issuers with bond-refinancing needs in the first half of 2020 had raised funds in late 2019 and early 2020 before the outbreak of COVID-19.
“But, unfunded cross-border refinancing needs are there for high-yield issuers in the second-half of 2020, and we should expect more issuances provided the market remains open for riskier borrowers”.
When moving from the sovereign to the financial institution space there was more optimism. Indeed, the outlook for bank issuance is positively upbeat. Only 15% of respondents thought that funding and liquidity would be significantly affected by Covid-19.
“The fact that banks do have very significant capital raising requirements over the next several years means that even with slower credit growth in China, the banks will still need to issue more capital instruments,” said Jonathan Cornish, head of APAC banks financial institutions at Fitch Ratings, explaining the findings.
In terms of the sectors where investors are looking to allocate their resources, it is perhaps not surprising that healthcare is overwhelmingly on top. And it is followed by sovereign bonds, infrastructure, public sector and the technology, media and telecom sector.
Investor outlook was summed up by the North Asian asset manager who said bluntly: “Consumer staples and utilities will perform well; tourism/hospitality is likely to struggle a lot.”
The bleak outlook that respondents have on tourism was carried through to the question on which infrastructure credits are likely to be most impacted by the current market situation.
Overwhelmingly this was thought to be airports. Indeed, with a score of 354, it was considerably higher than the next highest answer, which was seaports with 193.
But Sajal Kishore, head of APAC infrastructure and project finance at Fitch Ratings, believes that the near term negative sentiment may not be factoring the potential stronger recovery of domestic air travel.
“Obviously, transportation infrastructure has been badly hit with airports being the key one, but the underlying long termfundamentals favour continued investment in these assets,” he said adding “air travel was a luxury many years ago, and now it’s become a necessity”.
Markets might appear tough at the moment, but respondents to the survey are clearly looking forward to shifting their portfolios, as a representative of an Asian Central Bank put it, from “defensive to aggressive”.
Going forward, what will drive investor confidence initially is support from the government. Almost half (47.3%) said that government fiscal policy and fiscal support to issuers was the most important factor for this. But it was followed by a significant 38% who said that investor confidence will come from an improvement in market sentiment and liquidity position.
Those who responded to the survey in detail put this into perspective. “As long as government support is utilised to ensure liquidity, there is a risk in the system. Hence confidence would only emerge once we know that the economy is self-sustaining without any government support,” said the representative of an Asian Central Bank.
Another asset manager saw initial recovery tied very closely to the discovery of a vaccine for Covid-19, but future success to an economy standing on its own feet.
“Full confidence will come after we think we are past the economic pain points,” they said.
For several weeks until 5 May, FinanceAsia surveyed participants about the impact of Covid-19 on Asia’s credit bond markets. Completed answers came from 102 executives from across the region. Of those who responded, 24 were C-Suite executives, 23 were in senior investment management, and 55 were other.