Sell Government-Backed Junk on Asia's Growth Outlook, Morgan Stanley Says
Investors should sell speculative- grade debt of government-backed Asian companies and buy property or commodity bonds as economic growth in the region justifies more risk-taking, according to Morgan Stanley.
“It’s been the best-performing sector year-to-date but now it looks rich,” Viktor Hjort, a credit strategist with Morgan Stanley, said in a phone interview from Hong Kong. “Where the outlook is most compelling is China property, followed by commodity producers.”
Quasi-sovereign high-yield dollar bonds in Asia have returned 14 percent this year, compared with 12 percent for both high-yield corporate bonds and the debt of countries rated below investment-grade, JPMorgan Chase & Co. indexes show. Investment- grade company debt has returned 7 percent.
The China SE Shanghai Property Index has rallied 13 percent in the past month on expectations the government will ease measures to cool real estate prices. The world’s fastest-growing major economy is helping drive demand for commodities such as copper, aluminum and lead, with the LMEX London Metals Index climbing 18 percent in the past year.
“The fundamental drivers for copper, iron ore and coal are correlated and the Chinese economy is a major consumer of each, which makes commodity producers a nice pair” with China property, Hjort said.
Demand for high-yield quasi-sovereign bonds in the first half of the year was driven by risk aversion as investors sought safer assets amid concern that Europe’s sovereign debt crisis would spread, he said. High-yield, or junk, bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Developing economies in Asia will expand 9.2 percent in 2010, outpacing growth of 2.6 percent in advanced countries, the International Monetary Fund said on July 7.
Country Garden Holdings Co., a developer of condominiums in China’s Guangdong province rated BB by S&P, plans to sell as much as $400 million of five-year bonds, a person familiar with the matter said yesterday. Renhe Commercial Holdings Co., a BB rated developer of underground shopping centers in China, is meeting with fixed-income investors in Asia and Europe, two people familiar with the matter said yesterday.
Singapore’s Olam International Ltd. and Hong Kong’s KWG Property Holding Ltd. have also announced bond sales this week.
PT Berau Coal Energy’s 12.5 percent bonds due 2015 and sold at par on July 8 rose to 106.5 cents on the dollar yesterday to yield 10.756 percent, according to Stifel Nicolaus & Co. prices.
PT Perusahaan Listrik Negara’s 7.25 percent bonds due 2011 were trading at 105.63 cents on the dollar to yield 2.417 percent, down from a year-high of 106.5 cents on the dollar on Oct. 15, according to Royal Bank of Scotland Group Plc prices.
Listrik Negara is Indonesia’s state power utility while Berau Coal operates mines throughout the country.
Rising commodity prices give high-yield commodity producers “considerable flexibility” to cut debt and increase earnings in the medium-term, Hjort said.
“Average high-yield spreads in the second half are going to be driven by the more risky and pure corporate sectors,” he said, recommending investors shift toward an “underweight” position when it comes to high-yield quasi-sovereigns.