ING's bond team recommends investors take risk

INGÆs Asian dollar bond team predicts a harder sell for its emerging market strategy in 2007 but continues to target riskier assets.
One year ago, ING Securities said the economic outlook was the most positive it had ever seen and as a result moved to target the riskier end of the fixed-interest spectrum. Now ING says 2007 will be similar and that investors should remain in higher-risk positions.

One the sovereign debt front, according to Singapore-based managing director and head of Asian research Tim Condon, Pakistan is the most appealing market. ôPakistan underperformed Taiwan, Indonesia and Vietnam in the aftermath of the mid-year sell off,ö he says. ôThe yield spread on 10 and 20-year risk has converged to 25 basis points and we are over-weight Pakistan 2016s and 2036s.ö

The firm also recommends the Philippines over Vietnam.

Its view is that credit spreads will remain tight and converge across emerging Asia, due to the lack of volatility in the global economy and, regionally, high savings rates that depress yields.

ING has shifted from overweight to neutral on Indonesia based on lessening economic growth constraints, falling inflation, falling interest rates and an increase in borrowing.

ôFor 2007,ö Condon says, ôthe government financing plan includes another $2-2.5 billion in dollar bond issuance, up from $1 billion in 2006. Quasi sovereigns like [state power company] PLN, which recently issued $1 billion of five- and 10-year bonds, are also potential issuers. We see supply limiting the scope for more spread compression.ö

As for individual sectors ING is bullish on banking. Research vice president Brett Williams predicts that banks, with IndiaÆs ICICI leading the charge, will benefit from increased revenue supporting balance sheets, more onerous capital requirements, lower volatility, M&A activity and low interest rates.

The prevalence of hybrid securities as a funding vehicle for Asian banks is likely to increase next year, Williams argues, as part of a wider search for much-needed extra capital. ôThere is not enough bank capital on the market,ö he adds. ôMore sources of funding are needed to manage volatility and reduce pressure on banksÆ credit ratings.ö

But he argues that investors may steer clear of the asset class as spread premiums prove insufficient to overcome some rating and regulatory obstacles. As a result, he adds, issuers may add more cumulative payment features.

Telecommunications is the strongest Ing sector overweight. Research vice president Nicholas Cheng notes the convergence of yields spreads with sovereign debt. ôIn both Hong Kong and Korea,ö he says, ôconsolidation and M&A activity are going to be the main play. In emerging markets we expect strong growth because of low penetration rates and we see Pakistan Mobile re-rating closer to sovereign bonds.ö

With leveraged buyouts likely to resurface in 2007 Cheng argues that they will be limited by foreign ownership limitations, though he argues that price weakness as a result of LBO news flow could present buying opportunities.
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