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1、Lower Expectations for Return asLower Expectations for Return as Opportunities always Follow Risks 2013 investment strategy report on the credit bond market AnalystAnalyst Quqing A0230511040079 2012.12 Highlights While we have talked more about opportunities in 2012, “risks” might be the key tone of
2、 the market in 2013; Overseas markets are expected to ramp up, gaining a better footing than in 2012. A second recession is not likely to be seen in the US as a compromise will probably be achieved on the fiscal cliff issue, given nascent signs of recovery as evidenced by pickup in the real estate m
3、arket and improvements in employment. The European economy on the other hand is right at the trough of a U-shaped cycle, which means it will take a long time for any recovery to take place However impact of the European debt crisis on financial markets is expected to be alleviatedtime for any recove
4、ry to take place. However, impact of the European debt crisis on financial markets is expected to be alleviated. We believe urbanization will become a new driver for economic growth in China. As a result, the downtrend of Chinas economy takes place in a gradual manner of “downturn stabilization furt
5、her downturn further stabilization”. In the near term, recovery in the real estate sector and corporate stock replenishment will have positive impact on the economy. We believe the credit bond market will face a release of credit risks in 2013: While the broad economy will not disappoint, certain in
6、dustries still face the deterioration of credit risks; process of the second urbanization means the migration of credit risks as well as deterioration of creditworthiness, which might be released through increased channels, not necessary the default of credit bonds, as the default risks of other fin
7、ancing facilities could feed through into the credit bond market. Regulation of shadow banks is likely to spark risk release; We believe the market will also face liquidity risks in 2013:We believe the market will also face liquidity risks in 2013: Liquidity is not abundant on the bond market; there
8、 will be higher pressure in terms of credit bond supply; uncertainties around regulation of shadow banks add to the uncertainties regarding funding sources of credit bonds; as systematic risks threaten the bond market, liquidity will shift to risk assets from the debt market in a re-balancing of ass
9、et classes; insurers and other principal investors in the credit bond market will have lower demand for credit bonds as their investment scope expands; 2013 dt b dll fdit bd itf itt tti ldilldthht thltiili ht litf2013 does not bode well for credit bonds in terms of investment strategy; yields will e
10、dge up throughout the year, resulting in slight loss in terms of clean prices but will still register positive returns in terms of dirty prices; opportunities might come after the release of risks: From a stand point of both absolute and relative defensiveness, long-term credit bonds do not have muc
11、h investment value, while short-term financing bonds are cheaper. Though the economic trough is to be confirmed in 1H, potential release of credit risks will persist in individual sectors and companies. Credit spreads do not support any further decline, and more stringent regulation on shadow banks
12、will increase the risk of correction in low rated bonds with risk release proportional to regulation Corporate default risk will be alleviated in 2H when the economycorrection in low-rated bonds, with risk release proportional to regulation. Corporate default risk will be alleviated in 2H when the e
13、conomy rebounds, but the bond market will still be hurt by systematic risks as inflation hikes; widening of liquidity spreads of credit bonds will also bring about risks. Investment value of low-rated varies significantly: timing may mean a great difference in returns; high-rated lacks systematic op
14、portunities; short- term financing bonds are the cheapest. 申万研究2 2 Key Contents 1.Risk is a key word in the credit bond market in 2013 2.While long-term drivers for the economy are clearly visible, the deterioration of creditworthiness can not be neglected 3.Credit risk imminent 4.Liquidity risk clo
15、se on the heels 5.Investment strategy: returns always follow risk release 3 1.1 An “equilibrium market” for the high-rated but a “bull market” for the low-rated The high-rated saw yields going down and up again in 2012, finally ending basically on par with year beginning; manifesting the feature of
16、an “equilibrium market”, with the direction of interest rate change in line with the bottoming- out of economy. Thanks to reduced concern over corporate default risk, market liquidity was better than in 2011. Low-rated credit bonds enjoyed a bull market throughout the year, albeit a significant corr
17、ection in 3Q caused by tight liquidity. The risk appetite picked up in the bond market in 2012, in contrast to bearish economic outlook. Yields of high rated credit bonds returned to the level of year Yields of the low-rated credit bonds slumped Yields of high-rated credit bonds returned to the leve
18、l of year beginning, while yields of low-rated credit bonds slumped 5 0 5.57.0 T-bond : 5Y(AAA):5Y(AA):5Y (RHS) 50 2013Y interest yields 4.0 4.5 5.0 5.5 6.0 6.5 -50 0 bond:1Y bond:3Y bond:5Y AA):1Y AA):3Y AA):5Y AA):1Y AA):3Y Y(RHS) 2.5 3.0 3.5 6 8 7 2 8 3 0 5 8 2 8 3 0 4 9 3 8 9 5 0 5 4.5 5.0 -150
19、-100 T-b T-b T-b (AA (AA (AA (A (A (AA):5Y 11-12-01 11-12-16 11-12-31 12-01-18 12-02-07 12-02-22 12-03-08 12-03-23 12-04-10 12-04-25 12-05-11 12-05-28 12-06-12 12-06-28 12-07-13 12-07-30 12-08-14 12-08-29 12-09-13 12-09-28 12-10-19 12-11-05 12-11-20 12-12-05 -200 150 申万研究4 Source: SWS Research 1.2 A
20、 key word in 2013: Risk Economic prospects not pessimistic in the short term, nor is it optimistic in the long term: macroeconomic data showed improvements in 4Q12, suggesting that the economy is no longer at risk in the short term; however, the market is not optimistic about long-term growth either
21、, arguing that the economic downturn is far from over yet. What is the engine for long-term growth? It seems that the answer can be found in urbanization. Whilht lk dbttitii2012 “ i k ”i ht bthktf thk t i2013While we have talked more about opportunities in 2012, “risks” might be the key tone of the
22、market in 2013; The bond market will lack systematic opportunities in 2013; absolute and relative returns of credit bonds will no longer remain high; Credit risk: While the broad economic data is not disappointing, certain industries do not perform well; development in financing sources has also pro
23、vided increased channels for the release of credit risks; Liquidity risk: the funding front is not optimistic in general; fund movement might be seen as a result of the re-Liquidity risk: the funding front is not optimistic in general; fund movement might be seen as a result of the re balancing of a
24、sset allocation; liquidity risk might be induced by more stringent regulation on shadow banks; As there is “no gain without pain”, returns in 2013 might follow risk release; 申万研究5 Key Contents 1.Risk is a key word in the credit bond market in 2013 2.While long-term drivers for the economy are clearl
25、y visible, the deterioration of creditworthiness can not be neglected 3.Credit risk imminent 4.Liquidity risk close on the heels 5.Investment strategy: returns always follow risk release 6 2.1 The world economy is unlikely to get worse Mainstream institutions expect overseas markets to ramp up and g
26、ain a better footing than in 2012; OECD leading indicators show that the crisis is tapering off and trending closer to potential growth. Convergence of OECD leading indicatorsIn the next year, the world economy will make a turn with an uptrend 1.0% 1.5% GlobalUSEuro zoneJapanChina 2012E2013E2013.1Q
27、2013.2Q 2012.3Q 2013.4Q Bloomberg 2.22.62.12.42.73.0 0.0% 0.5% 7 8 8 8 8 9 9 9 9 0 0 0 0 1 1 1 1 2 2 2 IMF 3.33.63.53.53.73.8 World Bank 2.53.0 SWS 2.93.23.03.23.33.4 -1.0% -0.5% Dec-2007 Mar-2008 Jun-2008 Sep-2008 Dec-2008 Mar-2009 Jun-2009 Sep-2009 Dec-2009 Mar-2010 Jun-2010 Sep-2010 Dec-2010 Mar-
28、2011 Jun-201 Sep-2011 Dec-2011 Mar-2012 Jun-2012 Sep-2012 SWS -1.5% 申万研究7 Source: CEIC; SWS Research Dawn of economic recovery perceived in the US Slhdt dk dlithlt tt The real estate market is progressively picking up Hikes in stock and property markets brings about the wealth effect among residents
29、, which in turn drives Supply pressure has moderated markedly in the real estate sector 9 10 11 12Inventory-sales rate for new homes Inventory-sale ratio for existing homes consumer confidence and improves the labor market; The tussle between two parties will ultimately prevent the US from going ove
30、r the fiscal cliff; QE “N” is on the stocks. 3 4 5 6 7 8 QE N is on the stocks. The wealth effect caused by a pickup in value of 2 3 2001-1 2001-7 2002-1 2002-7 2003-1 2003-7 2004-1 2004-7 2005-1 2005-7 2006-1 2006-7 2007-1 2007-7 2008-1 2008-7 2009-1 2009-7 2010-1 2010-7 2011-1 2011-7 2012-1 2012-7
31、 Consumer confidence rebounds residents financial assets 8 9 50000000 55000000 Savings rate (LHS) Household financial assets 110 120 CCI (consumer confidence index) Current index Expectation index 3 4 5 6 7 40000000 45000000 50000000 70 80 90 100 0 1 2 3 02 02 02 03 03 04 4 04 05 05 06 06 07 07 07 0
32、8 08 09 9 09 10 0 11 11 2 2 30000000 35000000 40 50 60 -05 -05 -05 05 -06 -06 -06 06 -07 -07 -07 07 -08 -08 -08 08 -09 -09 -09 09 -10 -10 -10 10 -11 -11 -11 11 -12 -12 -12 12 申万研究8 Source: SWS Research Jan-0 Jun-0 Nov-0 Apr-0 Sep-0 Feb-0 Jul-0 Dec-0 May-0 Oct-0 Mar-0 Aug-0 Jan-0 Jun-0 Nov-0 Apr-0 Se
33、p-0 Feb-0 Jul-0 Dec-0 May-1 Oct-1 Mar-1 Aug-1 Jan-1 Jun-1 Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Europe: At the trough of a “U-shape” cycle Monetary liquidity environment graduall
34、y improves with quantitative easing by the ECB; The pressure of debt payment will become less onerous in 2013, though Greece would have the greatest pressure in May; impact of the European sovereign crisis on financial markets is expected to be alleviated. Certainly it will still take a long time fo
35、r the economy to recoverCertainly, it will still take a long time for the economy to recover. Relatively higher debt payment pressure in April and May Monetary environment improves in Europe 12 14 16 M2 growth Growth of total outstanding loans for non-financial enterprises Growth of total outstandin
36、g household loans 700 800 900 GreekPortugalItaly SpainIreland Euro 100 mn 6 8 10 12 300 400 500 600 700 9 4 1 6 1 8 3 0 5 2 7 2 9 4 1 6 1 -2 0 2 4 0 100 200 -1 -2 -3 -4 -5 -6 -7 -8 -9 0 1 2 2012 - 2012 - 2011 - 1 2011 - 2011 - 2010 - 2010 - 2009 - 1 2009 - 2008 - 1 2008 - 2008 - 2007 - 2007 - 2006 -
37、 1 2006 - 2006 - -4 2013- 2013- 2013- 2013- 2013- 2013- 2013- 2013- 2013- 2013-1 2013-1 2013-1 申万研究9 Source: CEIC; SWS Research 2.2 Long-term downturn of Chinas economy is a gradual process The market reaches a consensus on the downtrend of Chinas economy. But, is such a process continuous or gradua
38、l? Different paths will have very different impacts on financial markets; Downturn of Japans economy is not a one-way process 10% 15% 21 23 25 GDP (LHS) Population over 65 year old as % of total population(RHS) We believe it will be a downturn process of “downturn stabilization further downturn furt
39、her stabilization”. Such an assumption is supported by both the overseas experience and demographics factor (Cai Fang) See Entering into a Plateau without Any Gap A Few Points -5% 0% 5% 60-12 63-09 66-06 69-03 71-12 74-09 77-06 80-03 82-12 85-09 88-06 91-03 93-12 96-09 99-06 02-03 04-12 07-09 10-06
40、11 13 15 17 19 Seetegto aateaut outy Gapeo ts on Chinas Potential Growth Rate. Downturn of the US economy is not a one-way process -15% -10% 5% 196 196 196 196 197 197 197 198 198 198 198 199 199 199 199 200 200 200 201 5 7 9 11 Downturn of Chinas economy is gradual (Cai Fang) 6% 8% 13% 14% GDP grow
41、thPopulation over 65 year old as % (RHS) 9.83 10 00 12.00 14.00 2% 4% 11% 12% 10.29 7.19 6.08 4 00 6.00 8.00 10.00 -2% 0% 1960-03 1962-06 1964-09 1966-12 1969-03 1971-06 1973-09 1975-12 1978-03 1980-06 1982-09 1984-12 1987-03 1989-06 1991-09 1993-12 1996-03 1998-06 2000-09 2002-12 2005-03 2007-06 20
42、09-09 2011-12 9% 10% 0.00 2.00 4.00 Year Period 申万研究10 Source: SWS Research -4%8%79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 2.3 Urbanization will become a new engine for long-term growth in Chinas economy Though the population bonus is on the verge of a turning point, the country
43、 remains better positioned compared to developed countries; A huge scope still exists for urbanization in China in comparison with developed countries, although the urbanization rate has already exceeded 50%; Chinas GDP is likely to double again in 10 years led by urbanization. Chinas urbanization r
44、ate is lower than that in Japan and KoreaChina still has the population advantageChina s urbanization rate is lower than that in Japan and KoreaChina still has the population advantage 75% 71.5% 68.5% 69.9% 65% 70% % 55% 60% China: Population in the range of 15-64 year old as % Japan: Population in
45、the range of 15-64 year old as % 50% 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Japan: Population in the range of 15 64 year old as % Korea: Population in the range of 15-64 year old as % 申万研究11 Source: SWS Research Existing issues in the urbanization process Low urbanization r
46、ates in the mid and west regions will provide greater potential for the urbanization process going forward; There is a great difference in terms of urbanization rate when looking at different statistical data of registered urban citizens and resident population; the core issue in the second round of
47、 urbanization would be converting the migrant p p;gg rural population to urban citizens. The urbanization rate varies largely in the east, mid and west regionsUrbanization rates differentiate according to different statistical data 50 55 Urbanization rate(Permanent residence) Urbanization rate (Regi
48、stered permanent residence) 35 40 45 20 25 30 1 2 3 4 5 6 7 8 9 0 1 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 申万研究12 Source: CEIC; SWS Research The urbanization process means higher demand for consumption and infrastructure facilities The urbanization process means higher consumption ex
49、penditure; Higher demand for infrastructure facilities; The urbanization process means higher consumption expenditure 12,000 14,000 16,000Consumer expenditure per capita: urban (China) Consumer expenditure per capita: rural(China) Higher demand for infrastructure facilities; 2 000 4,000 6,000 8,000 10,000 12,000 0 2,000 1990 1992 1994 1996 1998 2000 2002 2