ASEAN Insight Provider, CrossASEAN Research

Angus Mackintosh

ASEAN Insight Provider

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Private Capital Markets

GoTo Gojek Tokopedia Tbk PT / Private Capital Markets

Recent news suggests that <a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab (0967655D SP)</a> and <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek (1379371D IJ)</a> have restarted discussions on a possible merger backed by SoftBank CEO and founder Masayoshi Son. Our view is that it seems this ride-hailing mega-merger becomes less-likely should <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> take a stake in <a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab (0967655D SP)</a>. It was recently reported that it would invest US$3bn into the ride-hailing company, with some of this stake potentially coming out of <a href="https://www.smartkarma.com/entities/uber-technologies-inc" target="_blank" data-smartkarma-citation="entities:430:1" rel="noopener">Uber (UBER US).</a>
Quite apart from the fact that <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek (1379371D IJ)</a> has only recently received investment from <a href="https://www.smartkarma.com/entities/facebook-inc-a" target="_blank" data-smartkarma-citation="entities:665:1" rel="noopener">Facebook Inc A (FB US)</a> and <a href="https://www.smartkarma.com/entities/paypal-holdings-inc" target="_blank" data-smartkarma-citation="entities:4747:1" rel="noopener">Paypal Holdings (PYPL US),</a> the company is also viewed as a  national champion in Indonesia, with high-profile shareholders such as <a href="https://www.smartkarma.com/entities/astra-international-tbk-pt" target="_blank" data-smartkarma-citation="entities:46:1" rel="noopener">Astra International (ASII IJ)</a> and Djarum Group, who may object to the deal, under which <a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab (0967655D SP)</a> may come out on top being the bigger company currently, in terms of recent valuations. 
There has been much debate surrounding the incessant competition between so-called Super Apps Indonesia-based <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek (1379371D IJ)</a> and Singapore headquartered <a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab (0967655D SP),</a> as they vie for position in the former's home market and across the rest of South-East Asia.  Although originally both App-based ride-hailing companies, both now offer a much wider variety of services including food-delivery and crucially, digital payments, and other financial services. Gojek through Go-Pay and Grab through GrabPay regionally, and OVO in Indonesia, where it has a stake. 
<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> backed <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek (1379371D IJ)</a> dominates in its home market of Indonesia, which makes up 90% of its revenues but it is also presenting some challenges to Grab in Singapore, Thailand, and Vietnam and possibly soon to be the Philippines and even Malaysia. 
<a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab (0967655D SP)</a> has been making in-roads into the App-based motorcycle and taxi business in Indonesia, as well as the food-delivery business through GrabFood with the use of heavy promotions and subsidies. Given a more recent focus on profitability plus the impact of COVID-19 PSBB (large scale social distancing) measures on all businesses, especially ride-hailing, it is undoubtedly feeling the pressure in Indonesia.
Both companies have formidable funding war chests, with <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek (1379371D IJ)</a> managing to complete its latest US$2.5bn round in the midst of the pandemic and topping this up again only a couple of months ago. Grab raised a whopping US$4.5bn in its last round and potentially another US$3bn round from <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> though some of this may be existing shares. 
In some ways, money is not the issue and it is the winning strategy that counts. <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek (1379371D IJ)</a> has a history of frugality but has made a number of missteps in the last year, withdrawing some of its GoLife services, withdrawing GoMart, and a failed attempt at entering the Philippines. <a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab (0967655D SP)</a> has been very aggressive in providing subsidies in its food businesses in Indonesia to gain share. It remains to be seen how this approach will pan out in the longer-term, especially in light of COVID-19, which has hit ride-hailing hard.
Future funding is another longer-term issue, despite the recent amounts that have been raised. In this respect, <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek (1379371D IJ)</a> is better positioned after its very recent funding round, which brought in <a href="https://www.smartkarma.com/entities/facebook-inc-a" target="_blank" data-smartkarma-citation="entities:665:1" rel="noopener">Facebook Inc A (FB US)</a> and <a href="https://www.smartkarma.com/entities/paypal-holdings-inc" target="_blank" data-smartkarma-citation="entities:4747:1" rel="noopener">Paypal Holdings (PYPL US)</a>. For <a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab (0967655D SP)</a>, it was less certain until recently, at a time when Softbank is reeling from the WeWork and OYO experiences. Valuations of global comparable such as <a href="https://www.smartkarma.com/entities/uber-technologies-inc" target="_blank" data-smartkarma-citation="entities:430:1" rel="noopener">Uber (UBER US)</a> and <a href="https://www.smartkarma.com/entities/lyft-inc" target="_blank" data-smartkarma-citation="entities:24423:1" rel="noopener">Lyft Inc (LYFT US)</a> have also come under pressure, which suggests that we could see some markdown on <a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab (0967655D SP),</a> especially with its higher exposure to ride-hailing.

Recent news suggests that Grab (0967655D SP) and Gojek (1379371D IJ) have restarted discussions on a possible merger backed by SoftBank CEO and founder Masayoshi Son. Our view is that it seems this ride-hailing mega-merger becomes less-likely should Alibaba Group (BABA US) take a stake in Grab (0967655D SP). It was recently reported that it would invest US$3bn into the ride-hailing company, with some of this stake potentially coming out of Uber (UBER US).
Quite apart from the fact that Gojek (1379371D IJ) has only recently received investment from Facebook Inc A (FB US) and Paypal Holdings (PYPL US), the company is also viewed as a  national champion in Indonesia, with high-profile shareholders such as Astra International (ASII IJ) and Djarum Group, who may object to the deal, under which Grab (0967655D SP) may come out on top being the bigger company currently, in terms of recent valuations. 
There has been much debate surrounding the incessant competition between so-called Super Apps Indonesia-based Gojek (1379371D IJ) and Singapore headquartered Grab (0967655D SP), as they vie for position in the former's home market and across the rest of South-East Asia.  Although originally both App-based ride-hailing companies, both now offer a much wider variety of services including food-delivery and crucially, digital payments, and other financial services. Gojek through Go-Pay and Grab through GrabPay regionally, and OVO in Indonesia, where it has a stake. 
Tencent Holdings (700 HK) backed Gojek (1379371D IJ) dominates in its home market of Indonesia, which makes up 90% of its revenues but it is also presenting some challenges to Grab in Singapore, Thailand, and Vietnam and possibly soon to be the Philippines and even Malaysia. 
Grab (0967655D SP) has been making in-roads into the App-based motorcycle and taxi business in Indonesia, as well as the food-delivery business through GrabFood with the use of heavy promotions and subsidies. Given a more recent focus on profitability plus the impact of COVID-19 PSBB (large scale social distancing) measures on all businesses, especially ride-hailing, it is undoubtedly feeling the pressure in Indonesia.
Both companies have formidable funding war chests, with Gojek (1379371D IJ) managing to complete its latest US$2.5bn round in the midst of the pandemic and topping this up again only a couple of months ago. Grab raised a whopping US$4.5bn in its last round and potentially another US$3bn round from Alibaba Group (BABA US) though some of this may be existing shares. 
In some ways, money is not the issue and it is the winning strategy that counts. Gojek (1379371D IJ) has a history of frugality but has made a number of missteps in the last year, withdrawing some of its GoLife services, withdrawing GoMart, and a failed attempt at entering the Philippines. Grab (0967655D SP) has been very aggressive in providing subsidies in its food businesses in Indonesia to gain share. It remains to be seen how this approach will pan out in the longer-term, especially in light of COVID-19, which has hit ride-hailing hard.
Future funding is another longer-term issue, despite the recent amounts that have been raised. In this respect, Gojek (1379371D IJ) is better positioned after its very recent funding round, which brought in Facebook Inc A (FB US) and Paypal Holdings (PYPL US). For Grab (0967655D SP), it was less certain until recently, at a time when Softbank is reeling from the WeWork and OYO experiences. Valuations of global comparable such as Uber (UBER US) and Lyft Inc (LYFT US) have also come under pressure, which suggests that we could see some markdown on Grab (0967655D SP), especially with its higher exposure to ride-hailing. 

Gojek and Grab - A Merger of the Super Apps on the Offing? We Think Not.

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div>The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.</div><div>Hong Kong saw shorts rise on <a href="https://www.smartkarma.com/entities/aia-group-ltd" target="_blank" data-smartkarma-citation="entities:14895:1" rel="noopener">AIA Group Ltd (1299 HK)</a>, <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a>, <a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a> and <a href="https://www.smartkarma.com/entities/esr-cayman-ltd" target="_blank" data-smartkarma-citation="entities:27983:1" rel="noopener">ESR Cayman (1821 HK)</a>, while there was short covering on <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan Dianping (3690 HK)</a>, <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (HK) (9618 HK)</a> and <a href="https://www.smartkarma.com/entities/semiconductor-manufacturing" target="_blank" data-smartkarma-citation="entities:14231:1" rel="noopener">Semiconductor Manufacturing (981 HK)</a>. Shorts increased in Industrials and Energy and were covered in Consumer Discretionary, Information Technology, Communication Services and Financials.</div><div>Japan saw an increase in shorts on <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a>, <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a> and <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-financial-group-inc" target="_blank" data-smartkarma-citation="entities:217:1" rel="noopener">Sumitomo Mitsui Financial Group (8316 JP)</a> and a reduction in shorts on <a href="https://www.smartkarma.com/entities/tokyo-gas-co-ltd" target="_blank" data-smartkarma-citation="entities:2332:1" rel="noopener">Tokyo Gas (9531 JP)</a>, <a href="https://www.smartkarma.com/entities/rohm-co-ltd" target="_blank" data-smartkarma-citation="entities:2953:1" rel="noopener">ROHM Co Ltd (6963 JP)</a>, <a href="https://www.smartkarma.com/entities/kao-corp" target="_blank" data-smartkarma-citation="entities:12933:1" rel="noopener">Kao Corp (4452 JP)</a> and <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl Corp (4921 JP)</a>. Sectorally, shorts increased in almost all sectors led by Communication Services, Consumer Discretionary, Financials, Information Technology, Industrials and Consumer Staples. With the September ex-dividend date coming up, a large part of the increase in short interest could be due to dividend enhancement trades.</div><div>Stocks in Korea that saw the most short covering were <a href="https://www.smartkarma.com/entities/s-oil-corp" target="_blank" data-smartkarma-citation="entities:1667:1" rel="noopener">S Oil Corp (010950 KS)</a>, <a href="https://www.smartkarma.com/entities/netmarble-corporation" target="_blank" data-smartkarma-citation="entities:22839:1" rel="noopener">Netmarble Corporation (251270 KS)</a>, <a href="https://www.smartkarma.com/entities/shinpoong-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:7296:1" rel="noopener">Shinpoong Pharmaceutical (019170 KS)</a> and <a href="https://www.smartkarma.com/entities/lg-display-co-ltd" target="_blank" data-smartkarma-citation="entities:7145:1" rel="noopener">LG Display (034220 KS)</a>. </div><div>Stocks in Taiwan that saw the highest increase in shorts were <a href="https://www.smartkarma.com/entities/alchip-technologies-ltd" target="_blank" data-smartkarma-citation="entities:20219:1" rel="noopener">Alchip Technologies (3661 TT)</a>, <a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a>, <a href="https://www.smartkarma.com/entities/genius-electronic-optical-co-ltd" target="_blank" data-smartkarma-citation="entities:9632:1" rel="noopener">Genius Electronic Optical (3406 TT)</a> and <a href="https://www.smartkarma.com/entities/txc-corp" target="_blank" data-smartkarma-citation="entities:5212:1" rel="noopener">Txc Corp (3042 TT)</a> while shorts were covered on <a href="https://www.smartkarma.com/entities/au-optronics-corp" target="_blank" data-smartkarma-citation="entities:6704:1" rel="noopener">Au Optronics (2409 TT)</a>, <a href="https://www.smartkarma.com/entities/asmedia-technology-inc" target="_blank" data-smartkarma-citation="entities:15732:1" rel="noopener">Asmedia Technology (5269 TT)</a>, <a href="https://www.smartkarma.com/entities/elan-microelectronics-corp" target="_blank" data-smartkarma-citation="entities:19789:1" rel="noopener">Elan Microelectronics (2458 TT)</a> and <a href="https://www.smartkarma.com/entities/yageo-corporation" target="_blank" data-smartkarma-citation="entities:13212:1" rel="noopener">Yageo Corporation (2327 TT)</a>.</div>

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.Hong Kong saw shorts rise on AIA Group Ltd (1299 HK), China Merchants Bank H (3968 HK), CNOOC Ltd (883 HK) and ESR Cayman (1821 HK), while there was short covering on Meituan Dianping (3690 HK), Ping An Insurance (H) (2318 HK), JD.com (HK) (9618 HK) and Semiconductor Manufacturing (981 HK). Shorts increased in Industrials and Energy and were covered in Consumer Discretionary, Information Technology, Communication Services and Financials.Japan saw an increase in shorts on Softbank Corp (9434 JP), Fast Retailing (9983 JP), Mitsubishi UFJ Financial (MUFG) (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP) and a reduction in shorts on Tokyo Gas (9531 JP), ROHM Co Ltd (6963 JP), Kao Corp (4452 JP) and Fancl Corp (4921 JP). Sectorally, shorts increased in almost all sectors led by Communication Services, Consumer Discretionary, Financials, Information Technology, Industrials and Consumer Staples. With the September ex-dividend date coming up, a large part of the increase in short interest could be due to dividend enhancement trades.Stocks in Korea that saw the most short covering were S Oil Corp (010950 KS), Netmarble Corporation (251270 KS), Shinpoong Pharmaceutical (019170 KS) and LG Display (034220 KS). Stocks in Taiwan that saw the highest increase in shorts were Alchip Technologies (3661 TT), TSMC (2330 TT), Genius Electronic Optical (3406 TT) and Txc Corp (3042 TT) while shorts were covered on Au Optronics (2409 TT), Asmedia Technology (5269 TT), Elan Microelectronics (2458 TT) and Yageo Corporation (2327 TT).

Asia Short Interest Weekly: Meituan, JD, PingAn, SMIC, Japan Divs, Netmarble, Shinpoong, Genius, TXC

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Kudos For Better Bottom-line:HSBC North America (5.HK/HSBA.LN) [HSBCNA] HSBCNA deserves some kudos for its positive 2Q20 earnings result of USD 48.7 mn during the height of the pandemic against a 1Q20 loss of USD 1.2 bn. The problem with these results, in our view, is that they appear incredibly managed, as revenues are increasingly reliant on lower quality capital markets revenue sources at 36.0% (27.6% in 1Q20). In other words, we do not believe 2Q20 these results are sustainable;*Hong Kong Tax Rate Continues To Mask Management’s Global Mistakes: When your core subsidiary in Hong Kong has a statutory corporate tax rate of 16.5% and the organization is not subject to global taxation, low taxes can mask the many mistakes that HSBC makes – particularly in the USA; and*HSBCNA Should Be Sold: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. Knowing HSBC management as we do, they will continue making the same mistakes over and over again.

*Kudos For Better Bottom-line:HSBC North America (5.HK/HSBA.LN) [HSBCNA] HSBCNA deserves some kudos for its positive 2Q20 earnings result of USD 48.7 mn during the height of the pandemic against a 1Q20 loss of USD 1.2 bn. The problem with these results, in our view, is that they appear incredibly managed, as revenues are increasingly reliant on lower quality capital markets revenue sources at 36.0% (27.6% in 1Q20). In other words, we do not believe 2Q20 these results are sustainable;*Hong Kong Tax Rate Continues To Mask Management’s Global Mistakes: When your core subsidiary in Hong Kong has a statutory corporate tax rate of 16.5% and the organization is not subject to global taxation, low taxes can mask the many mistakes that HSBC makes – particularly in the USA; and*HSBCNA Should Be Sold: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. Knowing HSBC management as we do, they will continue making the same mistakes over and over again.   

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Weakening oil prices, a flattening US$ yield curve and rising Eurodollar futures together point to a decline in economic demand prospects combined with an increase in lower for longer interest rate expectations. Against this backdrop, Asia’s high yield market underperformed the US although risk sentiment in both markets declined. The outcome of this week’s FOMC meeting may impact the directionality and strength of risk sentiment over the near term. The market may be disappointed.  In rate markets, reflation trade unwinding remained in vogue as yields on long-dated treasuries continued to decline. This resulted in continued yield curve flattening which has been underway in three of the last four weeks. In some respects, these moves suggest that the market does not believe that the Fed can achieve its new policy goals in the near term. At the shorter end of the interest rate curve, Eurodollar futures reverted to lower for even longer rate expectations as weakening oil prices increased supply / demand concerns. In-line with declining credit risk tolerance in Asia, only three bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than one-half lower than the prior week. Cross-over rated Senior Unsecured bonds underperformed other securities. Investors rotated into short-call, AT1-securities to gain higher yields while spreads on AT1 bonds with longer call dates widened by more than others. This suggests that financial system credit concerns remain low over the near term, despite longer-term uncertainty.In bank debt capital markets, over US$22 billion of securities were issued as banks continued to take advantage of low rates and sustained investor demand. In terms of demand, <a href="https://www.smartkarma.com/entities/united-overseas-bank-ltd" target="_blank" data-smartkarma-citation="entities:113:1" rel="noopener">United Overseas Bank's (UOB SP)</a> 10.5 non-call 5.5-year Tier II bond came with no new issue concession. At the same time, <a href="https://www.smartkarma.com/entities/boc-aviation" target="_blank" data-smartkarma-citation="entities:22689:1" rel="noopener">BOC Aviation (2588 HK)</a> brought its third issue of the year despite the turmoil in the aviation industry. <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a> and <a href="https://www.smartkarma.com/entities/sumitomo-mitsui-trust-holdings-inc" target="_blank" data-smartkarma-citation="entities:19450:1" rel="noopener">Sumitomo Mitsui Trust Holdings (8309 JP)</a> also issued Senior Unsecured notes. Meanwhile, Bahrain’s B+ rated 7-year Sukuk priced 2.5x Dubai’s Baa2 rated 10-year Sukuk that was issued last week. In terms of upcoming issuance, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank </a><a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">(BBL TB)</a> is conducting a roadshow and a Basel III compliant AT1 bond may follow. Overall, August was the busiest ever for US high grade issuance and September has started strong. Meanwhile high yield issuance during August finished as one of the busiest months on record. This should earn US banks and some foreign investment banks handsome Q3 fees. Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This week’s FOMC meeting may disappoint market expectations by not adding depth to the monetary policy canvas.  As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Weakening oil prices, a flattening US$ yield curve and rising Eurodollar futures together point to a decline in economic demand prospects combined with an increase in lower for longer interest rate expectations. Against this backdrop, Asia’s high yield market underperformed the US although risk sentiment in both markets declined. The outcome of this week’s FOMC meeting may impact the directionality and strength of risk sentiment over the near term. The market may be disappointed.  In rate markets, reflation trade unwinding remained in vogue as yields on long-dated treasuries continued to decline. This resulted in continued yield curve flattening which has been underway in three of the last four weeks. In some respects, these moves suggest that the market does not believe that the Fed can achieve its new policy goals in the near term. At the shorter end of the interest rate curve, Eurodollar futures reverted to lower for even longer rate expectations as weakening oil prices increased supply / demand concerns. In-line with declining credit risk tolerance in Asia, only three bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than one-half lower than the prior week. Cross-over rated Senior Unsecured bonds underperformed other securities. Investors rotated into short-call, AT1-securities to gain higher yields while spreads on AT1 bonds with longer call dates widened by more than others. This suggests that financial system credit concerns remain low over the near term, despite longer-term uncertainty.In bank debt capital markets, over US$22 billion of securities were issued as banks continued to take advantage of low rates and sustained investor demand. In terms of demand, United Overseas Bank's (UOB SP) 10.5 non-call 5.5-year Tier II bond came with no new issue concession. At the same time, BOC Aviation (2588 HK) brought its third issue of the year despite the turmoil in the aviation industry. Mitsubishi UFJ Financial (MUFG) (8306 JP) and Sumitomo Mitsui Trust Holdings (8309 JP) also issued Senior Unsecured notes. Meanwhile, Bahrain’s B+ rated 7-year Sukuk priced 2.5x Dubai’s Baa2 rated 10-year Sukuk that was issued last week. In terms of upcoming issuance, Bangkok Bank (BBL TB) is conducting a roadshow and a Basel III compliant AT1 bond may follow. Overall, August was the busiest ever for US high grade issuance and September has started strong. Meanwhile high yield issuance during August finished as one of the busiest months on record. This should earn US banks and some foreign investment banks handsome Q3 fees. Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This week’s FOMC meeting may disappoint market expectations by not adding depth to the monetary policy canvas.  As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: FOMC Meeting May Determine Near-Term Risk Sentiment

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Event-Driven

Last week it was revealed that Warren Buffet had taken stakes of about 5% in Japan’s five major trading companies. This comes at a time when the Japanese market overall offers value investors rich pickings relative to valuations that had been getting more stretched by the day in other regions, especially the US. Below, we provide a quick synopsis of the trading companies’ business models and our thoughts on other potential investments that could attract Berkshire.

Last week it was revealed that Warren Buffet had taken stakes of about 5% in Japan’s five major trading companies. This comes at a time when the Japanese market overall offers value investors rich pickings relative to valuations that had been getting more stretched by the day in other regions, especially the US. Below, we provide a quick synopsis of the trading companies’ business models and our thoughts on other potential investments that could attract Berkshire.

A Quick Look at the Buffet Trade and the Most Obvious Follow-Ons

Japan

Mitsubishi UFJ Financial Group, Inc. (MUFG) is a holding company established through the merger of Mitsubishi Tokyo Financial Group and UFJ Holdings. As a financial group, the Company provides a variety of financial and investment services including commercial banking, trust banking, international finance, and assets management services.

Mitsubishi UFJ Financial (MUFG) (8306 JP)

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Mitsubishi UFJ Financial (MUFG) (8306 JP)

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Bank Credit Weekly: FOMC Meeting May Determine Near-Term Risk Sentiment

Weakening oil prices, a flattening US$ yield curve and rising Eurodollar futures together point to a decline in economic demand prospects combined...

Hank Calenti, CFA

A Quick Look at the Buffet Trade and the Most Obvious Follow-Ons

Last week it was revealed that Warren Buffet had taken stakes of about 5% in Japan’s five major trading companies. This comes at a time when the...

Mio Kato

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