With an overall aggregate score of 878 votes, Citigroup won our fixed income research poll this year, just pipping UBS. The poll saw 435 investor responses, our largest number ever. Citigroup's team of Ivan Lee (head of credit research), So-Yon Sohn (banks & financials) and Johanna Chua (sovereigns) must be doing something right. Here they talk about their best calls of the year and their outlook going forward.
What have been your best calls this year?
Lee: At the beginning of the year I said the market would have a pretty good run because fundamentals look good and there would be a focus on Asia. That has turned out to be the case. The two credits I have been most bullish on are Hutchison and PCCW. They have rallied 90bp and 130bp respectively. Both credits were misunderstood by the market late last year and early this year. We suggested investors look into the fundamentals, with neither company having any major credit problems and subsequent spread movements have reflected that.
Sohn: My call on SK Corp was very opportunistic, because we were able to find some sellers and sourced a good amount of bonds. I cover financial institutions and Korean corporates, so we were quite tuned into all the developments from both the creditor and SK Corp side, which allowed us to better understand the risks. You may recall that SK Corp'06 fell to 65% after the SK Global accounting fraud was uncovered. It has since rebounded to 105%. We've also been consistently positive on the Korean bank sub-debt paper in dollars, and Thai sub-debt. In Malaysia we've been very positive about RHB 13s which came at 370bp over and is now trading at 183bp and traded as tight as the 170bp level.
Chua: The Philippines was one of our major calls. At the start of the year we were significantly underweight the Philippines and that proved to be a good call because it had underperformed other emerging markets at the beginning of the year. We then made a tactical move in March when we significantly reduced our underweight because we thought the liquidity conditions were very good and sure enough the Philippines did catch up with the rally as fiscal performance started to improve. Politics is something we watch very closely and we continue to make curve trades - whether steepening or flattening - every time we see political events getting worse or improving. We expected Arroyo to stand for re-election since the time she went to the US. The curve is so volatile so you have to watch events closely.
Indonesia standby loans was the big call we made this year. We were very bullish on these at the start of the year and were convinced Indonesia was not going to go back to an IMF programme or reschedule its commercial debt. Some of the standby-loans used to be yielding something like 30% last year and have gone down to 9%.
Do you think your success in this year's poll is also partly a result of the team's continuity?
Lee: It's a combination of analysts getting better each year and our seemless cooperation and exchange of views. We can tap into Johanna's sovereign developments and she can tap into our view on the banking sector and the corporate sector. We also have better sales and distribution because of the integration between Salomon and Citibank's salesforce and we now have a much wider investor reach and a bigger audience.
We have also added to the team. We hired Kenneth Ho from Goldman Sachs in March 2003 - an excellent hire in my opinion as it is difficult to hire a good analyst these days. Ken is specifically covering Indonesian high-yield and restructured debts.
I'd like to also mention Scott Bennett who has been with us since early-2000 through the integration of Schroders. His profile among the mainstream investors is not that high mainly due to his extensive involvement in our distressed business in Thailand. But Scott does regularly publish and his sell-side coverage includes corporates in Malaysia, Thailand, Singapore and Philippines. He plays an important role in getting Citi's number three ranking in high-grade and high-yield/distressed research.
Sohn: We have regular publications that we have been consistently issuing for the past four years. It's something investors expect to see on a weekly and a monthly basis.
Chua: One of the advantages from the sovereign perspective is that we have a local Citibank presence in every office around Asia, and that provides a lot of local colour. Plus we have 17 economists across the region in Asia alone.
What calls are you making now?
Lee: The overall liquidity in the region is still strong and the fundamentals are still improving. The momentum is still positive and Hutchison and PCCW are still good value - they're still the widest yielding high grade corporate bonds in Asia.
Sohn: Everything is quite tight now, so we have to look for better relative value. In the banking universe that is the Korean bank sub-debts which are outstandingly cheap and are a good relative play. I think the worst is over with the consumer lending problem.
Chua: And in Indonesia the standby loans are still cheap relative to similarly-rated credits. There's a lot of upside particularly on the short dated stuff. The Philippines meanwhile is trading 50bp wider than Turkey, wider than Columbia, and relative to other emerging markets it is 100bp wider. So it is a laggard, but I am still a believer and a lot of the noise is exaggerated. So the Philippines is starting to look relatively cheap.