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CIO Weekly – Featuring BNP Paribas WM’s Prashant Bhayani

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This week: BNP Paribas WM favours Asia HY versus its developed market counterparts; UBP: Global economy to rebuild strength in 2H20; Pictet WM stay positive on China despite overall underweight call on equities; UBS GWM: Risk of a second dip is moderate in Asia market

BNP Paribas WM favours Asia HY versus its developed market counterparts

Asian high yield (HY) is currently offering attractive value for investors compared to its developed market counterparts, mainly due to the yield differentials, according to BNP Paribas Wealth Management.

HY bonds have experienced an indiscriminate sell-off year to date, driven both by a looming recession and the decline in oil prices. Prashant Bhayani, chief investment officer, Asia for BNP Paribas Wealth Management told Asian Private Banker that although the surprise purchases of investment grade and HY bonds by central banks triggered a “fast and furious” rebound, the overall outlook for HY remains “grim”.

Yet, within HY, the historical high discount level still favours Asia, he said, adding that Asia HY is still offering 300 bps spread pick up over US high yield.

“Excluding the energy sector (a significant proportion of US HY is oil companies), the spread difference is ~400 bps,” he said. “Furthermore, there is 300-500 bps spread difference between Asia and US single B and BB names.”

“Hence, Asia HY bonds are trading at a material discount vs. their US peers, and the current discount level is historically high.”

The stimulus from PBoC in China, the largest issuer of high yield bonds, also favours the market, the bank noted, adding that according to recent credit lending data released by the central bank, total social financing rose to a record in March, indicating the stimulus pace is increasing.

Within China HY, BNP Paribas Wealth Management is in particular positive on the China property sector, reasoning that this industry is “too big to fail”.

“The property sector is strategically important to the Chinese government, accounting ~10% direct GDP contribution. If we include the upstream and downstream sectors (e.g. construction, steel, furniture etc.), the total GDP contribution would be approximately 25-30%,” Bhayani said.

Additionally, compared to other industries, Chinese property sector tends to be more immune from the global pandemic or economic slowdown, he said, adding that from a monetary policy’s perspective, PBoC has more room to ease.

“The pandemic has somewhat stabilised in China now. Moreover, the property sector is relatively closed, which means it is fundamentally more domestically driven and less affected by the global economic slowdown or oil price movement,” Bhayani said,

“Most importantly, the US Fed cutting rates to zero will put less capital outflow worries for China, which allows more easing flexibility for PBoC.”

UBP: Global economy to rebuild strength in 2H20

As central banks have been successfully “improving market functioning” recently, UBP believes that the global economy will rebuild its strength in the second half of 2020.

“After a sharp recession in Q120, the progressive end of global lockdowns in May-June and a peak in COVID cases should enable global economies to rebuild positive growth momentum in 2H20,” UBP said.

“The strong policy support from both monetary and fiscal authorities should underpin a rebound in activity in 2021.”

In terms of equity investments, the bank has been restoring protection after the April rebound, believing that stock selections will be the key performance driver of an equity portfolio.

“With equity valuations rich in aggregate, we view alpha via stock selection as a key driver to total returns looking ahead,” it said.

“In particular, we look to expand exposure to companies with high-quality earnings streams and sustainable growth prospects.”

Pictet WM stays positive on China despite overall underweight call on equities

Pictet Wealth Management is overweight on China although the firm believes “significant risks” remains in the overall market.

“Last week, only three US sectors out of 12 outperformed the broader market,” the wealth manager said. “The market appears to be ignoring the decline in earnings and the deterioration of economic conditions. We see significant risks remaining as economies attempt to reopen and remain underweight equities overall.”

However in China, with the signs of business activities re-emerging, the firm has seen an economic divergence between China and the rest of the world.

Although some economies in Europe and the US attempt to reopen for business, US unemployment has reached nearly 15%, the firm pointed out, adding that the Bank of England warned that the UK could be on track to face its worst recession in three centuries.

“Somewhat encouragingly, China, the world’s first economy to emerge from a state-imposed coronavirus lockdown, is showing signs of activity slowly picking up again. While unsurprisingly external demand has collapsed, Chinese construction and industrial activity have re-accelerated.”

UBS GWM: Risk of a second dip is moderate in Asia market

UBS Global Wealth Management believes the chance of a second wave of sell-off in the Asia ex-Japan market is limited, as 1Q20 earnings results have shown to be more resilient than expected.

“Despite recovering almost 20% from the recent lows, Asia ex-Japan is still trading at a price-to-book ratio of only 1.3× — still 20% away from mid-cycle valuations,” the bank pointed out.

“The risk of a second dip may be contingent on a significant downgrade to current earnings growth projections or a major escalation in US-China trade tensions. At this stage, we see these risks as moderate.”

On a full-year basis, the Swiss giant expects Asia to report “flat earnings growth” in 2020, while globally, a 20% decline is likely to be seen.

On valuations, the MSCI China index is trading at a forward price-to-earnings (P/E) ratio of 10.7×, or a 0.2 standard deviation below its historical average, indicating an attractive level.

“If trade tensions escalate sharply, we could see price setbacks of up to 10%,” it said.

Within China equities, the bank is positive on those domestic-driven sectors, advising investors to focus more on consumption and infrastructure themes.

“Since the near-term backdrop for equities remains volatile and uncertain, we advise investors to rotate from sectors and markets highly exposed to exports to those that are domestic-oriented like consumption and infrastructure-related sectors and China,” it concluded.

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