Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

Thematic (Sector/Industry)

It had been 3 months since we cautioned our readers on the Good, the Bad, and the Ugly of COVID-19 ( <a href="https://www.smartkarma.com/insights/market-monitor-a-corona-hangover" target="_blank" data-smartkarma-citation="insights:36593" rel="noopener">Market Monitor: A Corona Hangover</a>, <a href="https://www.smartkarma.com/insights/market-monitor-friday-13th-pandemic" target="_blank" data-smartkarma-citation="insights:37459" rel="noopener">Market Monitor: Friday 13th Pandemic</a>, and <a href="https://www.smartkarma.com/insights/market-monitor-the-corona-carnage" target="_blank" data-smartkarma-citation="insights:38405" rel="noopener">Market Monitor: The Corona Carnage</a>). Market has rebounded but stayed way below the level prior to COVID-19. We believe negative headline risk on the second wave of the COVID-19 infection and disappointing economic/financial figures remain. Until we have an effective vaccine for the mass (which we heard will take 10 more months to develop), we do not expect the return to a bull market. We see the New Normal as the New Abysmal for global economic growth. That said, a volatile and uncertain market will keep investors in the fixed income market on lowered US rates.
We prefer defensive industries such as utilities, food, agriculture, medical, and consumer non-discretionary. We also prefer renewable energy on a continued focus on fighting climate change (which we believe will receive more support as a result of more believers in science). Rising defaults will bring buying opportunities for those who do homework (see our recent reports: <a href="https://www.smartkarma.com/insights/dr-peng-telecom-media-group-on-ventilator" target="_blank" data-smartkarma-citation="insights:39238" rel="noopener">Dr. Peng Telecom &amp; Media Group: On Ventilator</a>  and <a href="https://www.smartkarma.com/insights/sri-lanka-no-default-this-year" target="_blank" data-smartkarma-citation="insights:39301" rel="noopener">SRI LANKA: No Default This Year</a>). Government support for the national champion corporates and industries will also be key (i.e. property development in China).

It had been 3 months since we cautioned our readers on the Good, the Bad, and the Ugly of COVID-19 ( Market Monitor: A Corona Hangover, Market Monitor: Friday 13th Pandemic, and Market Monitor: The Corona Carnage). Market has rebounded but stayed way below the level prior to COVID-19. We believe negative headline risk on the second wave of the COVID-19 infection and disappointing economic/financial figures remain. Until we have an effective vaccine for the mass (which we heard will take 10 more months to develop), we do not expect the return to a bull market. We see the New Normal as the New Abysmal for global economic growth. That said, a volatile and uncertain market will keep investors in the fixed income market on lowered US rates.
We prefer defensive industries such as utilities, food, agriculture, medical, and consumer non-discretionary. We also prefer renewable energy on a continued focus on fighting climate change (which we believe will receive more support as a result of more believers in science). Rising defaults will bring buying opportunities for those who do homework (see our recent reports: Dr. Peng Telecom &amp; Media Group: On Ventilator  and SRI LANKA: No Default This Year). Government support for the national champion corporates and industries will also be key (i.e. property development in China).

We see 2020 as full of surprises, marked by rising geopolitical risk. Major headlines this year will include the US election in November, BREXIT, the greater China situation (which includes a cross-strait tension between China and Taiwan and the on-going protest in Hong Kong), the US-China trade war, a lack of progress in the Nuclear talk with North Korea, and, last but not least, the middle east tension which has already escalated to the next level. The attack that killed Iran’s top general on 2-Jan started the year on the right track for gold and oil prices as well as those relying on prices of these two commodities, such as the Mideastern countries and Russia.
In the year ahead, we favor equities over bonds in general.  As we believe valuations are stretched, securities selection is key and a buying opportunity on the sell-off event, especially stemming from the geopolitical risk, will reward value investors. We prefer emerging markets (EM) equities and bonds as we expect more upside potentials in light of improving credit fundamentals and a continued fund flow into an EM world for diversification away from developed markets (DM). At the end of the day, unpredictable policy shifts in the US and in Europe do not help. We also do not expect China’s trade war with the US and debt debacle to go away anytime soon.
In a year of rising geopolitical risk, we expect infrastructure, utilities, and other non-cyclical businesses to do better. However, rising oil prices and continued recovery (albeit at a slow pace) should help the oil and gas sector.
This year should be another record year for green financing, spurred by more awareness that our planet is changing for the worst (i.e. the bushfire in Australia). Green financing (including green bonds) has a more committed group of investors which means less volatile spread movement in general.
In 2020, we will add additional angles to our fixed income research to include equity and F/X strategies as well as green bond research. Capital markets continue to evolve and, even at a slower pace than expected, we believe local currency EM bonds and tokenized securities (i.e. security tokens) are two topics we will follow closely. Stay tuned!

We see 2020 as full of surprises, marked by rising geopolitical risk. Major headlines this year will include the US election in November, BREXIT, the greater China situation (which includes a cross-strait tension between China and Taiwan and the on-going protest in Hong Kong), the US-China trade war, a lack of progress in the Nuclear talk with North Korea, and, last but not least, the middle east tension which has already escalated to the next level. The attack that killed Iran’s top general on 2-Jan started the year on the right track for gold and oil prices as well as those relying on prices of these two commodities, such as the Mideastern countries and Russia.
In the year ahead, we favor equities over bonds in general.  As we believe valuations are stretched, securities selection is key and a buying opportunity on the sell-off event, especially stemming from the geopolitical risk, will reward value investors. We prefer emerging markets (EM) equities and bonds as we expect more upside potentials in light of improving credit fundamentals and a continued fund flow into an EM world for diversification away from developed markets (DM). At the end of the day, unpredictable policy shifts in the US and in Europe do not help. We also do not expect China’s trade war with the US and debt debacle to go away anytime soon.
In a year of rising geopolitical risk, we expect infrastructure, utilities, and other non-cyclical businesses to do better. However, rising oil prices and continued recovery (albeit at a slow pace) should help the oil and gas sector.
This year should be another record year for green financing, spurred by more awareness that our planet is changing for the worst (i.e. the bushfire in Australia). Green financing (including green bonds) has a more committed group of investors which means less volatile spread movement in general.
In 2020, we will add additional angles to our fixed income research to include equity and F/X strategies as well as green bond research. Capital markets continue to evolve and, even at a slower pace than expected, we believe local currency EM bonds and tokenized securities (i.e. security tokens) are two topics we will follow closely. Stay tuned!

Frontier and emerging markets (Vietnam)

Dylan Waller

Cross Asset Strategy

Sri Lanka's equity market is currently in an attractive state following poor performance in recent years.  MSCI Sri Lanka IMI trades at 8.0x PE and 0.8xPB as of the end of September, and as I mentioned in <a href="https://www.smartkarma.com/insights/banking-on-sri-lanka" target="_blank" data-smartkarma-citation="insights:25670" rel="noopener">Banking on Sri Lanka, some of the countries banks are trading well below book value. </a> Sri Lanka's tourism industry will be a key driver of growth in the coming years.  However, tourist arrivals began to decline this May, following the terrorist attack that occurred this April, which will disrupt the country's economic growth in the short term.
The IMF projects that Sri Lanka’s economic growth will still reach 3.6% this year, which will be driven by a recovery in agriculture and manufacturing.
One major thorn that I previously addressed in <a href="https://www.smartkarma.com/insights/sri-lanka-s-short-term-outlook-is-hazy-limited-pockets-of-value-present" target="_blank" data-smartkarma-citation="insights:26903" rel="noopener">Sri Lanka's Short Term Outlook Is Hazy: Limited Pockets of Value Present</a> was the fact that the country's currency performed very poorly during 2018.  However, the currency is now in a relatively stable position, which has been supported by the increase in foreign exchange reserves this year.
The main potential long term catalysts for Sri Lanka includes the transition of its economy, which needs to be driven by FDI that focuses on new industries.  The country's current export structure is very poorly diversified given that textile and agriculture products both collectively account for 66.4% of the country’s total exports. 
Sri Lanka is well worth monitoring for value investing opportunities in the banking sector, investing in the bond market ( <a href="https://www.smartkarma.com/insights/sri-lanka-hope-amidst-turbulence" target="_blank" data-smartkarma-citation="insights:26286" rel="noopener">Sri Lanka: Hope Amidst Turbulence</a> ), or by investing in companies that are expanding operations outside of Sri Lanka and targeting the FMCG and healthcare sectors ( <a href="https://www.smartkarma.com/insights/sri-lanka-market-update-hemas-holdings-sails-smoothly-through-the-hazy-macro-political-picture" target="_blank" data-smartkarma-citation="insights:29246" rel="noopener">Sri Lanka Market Update: Hemas Holdings Sails Smoothly Through the Hazy Macro/Political Picture</a> ).

Sri Lanka's equity market is currently in an attractive state following poor performance in recent years.  MSCI Sri Lanka IMI trades at 8.0x PE and 0.8xPB as of the end of September, and as I mentioned in Banking on Sri Lanka, some of the countries banks are trading well below book value.   Sri Lanka's tourism industry will be a key driver of growth in the coming years.  However, tourist arrivals began to decline this May, following the terrorist attack that occurred this April, which will disrupt the country's economic growth in the short term.
The IMF projects that Sri Lanka’s economic growth will still reach 3.6% this year, which will be driven by a recovery in agriculture and manufacturing.
One major thorn that I previously addressed in Sri Lanka's Short Term Outlook Is Hazy: Limited Pockets of Value Present was the fact that the country's currency performed very poorly during 2018.  However, the currency is now in a relatively stable position, which has been supported by the increase in foreign exchange reserves this year.
The main potential long term catalysts for Sri Lanka includes the transition of its economy, which needs to be driven by FDI that focuses on new industries.  The country's current export structure is very poorly diversified given that textile and agriculture products both collectively account for 66.4% of the country’s total exports. 
Sri Lanka is well worth monitoring for value investing opportunities in the banking sector, investing in the bond market ( Sri Lanka: Hope Amidst Turbulence ), or by investing in companies that are expanding operations outside of Sri Lanka and targeting the FMCG and healthcare sectors ( Sri Lanka Market Update: Hemas Holdings Sails Smoothly Through the Hazy Macro/Political Picture ). 

Banking on Sri Lanka: October 2019 Update

Asia Fixed Income Analyst

Derek Silva

Market Securities (Dubai)

Market Securities (Dubai) Limited ('MSD') is an independent financial intermediary specialising in financial products. The client base is large financial institutions based in various locations around the globe. The company is based in the Dubai International Financial Centre (DIFC) and is regulated by the Dubai Financial Services Authority (DFSA).

MSD's Cross Asset Team provides institutional investors access to multi-asset services through desks in London and Dubai, including EM fixed income, cross asset derivatives, relative value, risk arbitrage, funds and ETFs. Market Securities has access to a broad range of execution services through the office network in London, Paris, New York and Dubai. 

Market Securities’ Cross Asset Team is a unique group of specialists focusing on emerging market fixed income strategies. The team derives investment insights from cross asset inputs. 
MSD's Cross Asset team combines nearly 20 years of average global investment experience covering both buy and sell side, with the core team having worked together for 15 years. Over the years, the team has built a strong network of individuals and institutions to gain access to information and investment insights.

The team was established to service the growing needs of Tier 1 investors in an independent and unbiased manner. The team is passionate, opinionated and disciplined.

You can get in touch with the Market Securities team:

Derek Silva <derek.silva@market-securities.com> (Asia Fixed Income Analyst)
Ville Kuokka <ville.kuokka@market-securities.com> (MENA/EM Analysis/Execution)
Mika Parviainen <mika.parviainen@market-securities.com> (MENA/EM Analysis/Execution)

Credit

Sri Lanka Government International Bond / Credit

Sri Lanka Government International Bond (SRILAN GOVT)

<ul><li>SRILAN bonds are gradually recovering after successful new loans and swaps have helped with liquidity. But these short-term stopgaps don’t help the deeper structural debt problem.</li><li>Foreign reserves are rapidly depleting, from $6.9bn to $4.0bn in less than a year.</li><li>Imports dominate exports while FDI is weak and cannot keep up with foreign currency outflows to repay debt – these both lead to frequent Balance of Payments crises.</li><li>The only real saviour for Sri Lanka is the IMF, but it refuses to ask the IMF for help – and IMF help is anyway dependent on BoP stability, which is only worsening for Sri Lanka.</li><li>It’s not only the amount of debt, but also the composition of debt, as today’s debt repayment burden is much heavier than before.</li><li>Very short dated SRILAN bonds are trading near par. For bonds beyond one year, there’s more upside. But with ~$4bn of debt service obligations and large bond maturities each year until 2030, we have no confidence in Sri Lanka avoiding default without IMF help. We dislike SRILAN bonds.</li></ul>

SRILAN bonds are gradually recovering after successful new loans and swaps have helped with liquidity. But these short-term stopgaps don’t help the deeper structural debt problem.Foreign reserves are rapidly depleting, from $6.9bn to $4.0bn in less than a year.Imports dominate exports while FDI is weak and cannot keep up with foreign currency outflows to repay debt – these both lead to frequent Balance of Payments crises.The only real saviour for Sri Lanka is the IMF, but it refuses to ask the IMF for help – and IMF help is anyway dependent on BoP stability, which is only worsening for Sri Lanka.It’s not only the amount of debt, but also the composition of debt, as today’s debt repayment burden is much heavier than before.Very short dated SRILAN bonds are trading near par. For bonds beyond one year, there’s more upside. But with ~$4bn of debt service obligations and large bond maturities each year until 2030, we have no confidence in Sri Lanka avoiding default without IMF help. We dislike SRILAN bonds.

In our last report dated 12-May-20 ( <a href="https://www.smartkarma.com/insights/sri-lanka-no-default-this-year" target="_blank" data-smartkarma-citation="insights:39301" rel="noopener">SRI LANKA: No Default This Year</a> ), we highlighted the fact that Sri Lanka will not default this year. We also compared <a href="https://www.smartkarma.com/entities/sri-lanka-government-international-bond" target="_blank" data-smartkarma-citation="entities:28349:1" rel="noopener">Sri Lanka Government International Bond (SRILAN GOVT)</a> with its closest Asian peers such as Mongolia, Papua New Guinea, Tajikistan, Pakistan, and Iraq. In this report, we update with recent events on the country and relative valuation of Sri Lanka’s SRILAN complex.
Despite deterioration in macroeconomic fundamentals (falling revenue vs. USD1bn debt instalment in October) further worsened by COVID-19, we remain confident that it is unlikely for Sri Lanka to default on its debt obligations in the next 12 months, given its success in securing new credit facilities partially offset by a suspension of IMF Extended Fund Facility (EFF) this month.  
S&amp;P’s downgrade of Sri Lanka’ s issuer credit rating to B- from B should lead to Moody’s downgrade of the same rating to B3 from B2 in October in the worst case scenario of which we do not believe investors will be surprised with. We have viewed Sri Lanka as a B- sovereign credit and at the “B-“ range, and we see the SRILAN complex as attractive versus peers despite a rally. We like SRILAN 21s to 24s as the most attractive within the SRILAN complex and assign our OVERWEIGHT recommendation. We assign a NEUTRAL recommendation to the rest of the SRILAN complex.
The Asian USD bond universe has outperformed since many countries exited the first wave of COVID-19. Our base case scenario calls for the mass adoption of vaccines to be at least a year away and we expect the default trend to head upward and the global economy to slowly make a comeback, starting in 2022. That said, we expect a depressed yield environment to make Asian USD bonds attractive versus developed market USD bonds. That said, we expect defensive sectors such as sovereign, telecommunications, utilities, insurance, and defence to outperform cyclical sectors towards 2021. We also like issuers which will be supported implicitly and explicitly by sovereign credits.

In our last report dated 12-May-20 ( SRI LANKA: No Default This Year ), we highlighted the fact that Sri Lanka will not default this year. We also compared Sri Lanka Government International Bond (SRILAN GOVT) with its closest Asian peers such as Mongolia, Papua New Guinea, Tajikistan, Pakistan, and Iraq. In this report, we update with recent events on the country and relative valuation of Sri Lanka’s SRILAN complex.
Despite deterioration in macroeconomic fundamentals (falling revenue vs. USD1bn debt instalment in October) further worsened by COVID-19, we remain confident that it is unlikely for Sri Lanka to default on its debt obligations in the next 12 months, given its success in securing new credit facilities partially offset by a suspension of IMF Extended Fund Facility (EFF) this month.  
S&amp;P’s downgrade of Sri Lanka’ s issuer credit rating to B- from B should lead to Moody’s downgrade of the same rating to B3 from B2 in October in the worst case scenario of which we do not believe investors will be surprised with. We have viewed Sri Lanka as a B- sovereign credit and at the “B-“ range, and we see the SRILAN complex as attractive versus peers despite a rally. We like SRILAN 21s to 24s as the most attractive within the SRILAN complex and assign our OVERWEIGHT recommendation. We assign a NEUTRAL recommendation to the rest of the SRILAN complex.
The Asian USD bond universe has outperformed since many countries exited the first wave of COVID-19. Our base case scenario calls for the mass adoption of vaccines to be at least a year away and we expect the default trend to head upward and the global economy to slowly make a comeback, starting in 2022. That said, we expect a depressed yield environment to make Asian USD bonds attractive versus developed market USD bonds. That said, we expect defensive sectors such as sovereign, telecommunications, utilities, insurance, and defence to outperform cyclical sectors towards 2021. We also like issuers which will be supported implicitly and explicitly by sovereign credits.

SRI LANKA: Surviving Between a Rock and a Hard Place

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Sri Lanka Government International Bond (SRILAN GOVT)

Market Monitor: The New Abysmal

It had been 3 months since we cautioned our readers on the Good, the Bad, and the Ugly of COVID-19 ( Market Monitor: A Corona Hangover, Market...

Bondcritic

2020 Strategy: Less Than 20/20

We see 2020 as full of surprises, marked by rising geopolitical risk. Major headlines this year will include the US election in November, BREXIT,...

Bondcritic

Banking on Sri Lanka: October 2019 Update

Sri Lanka's equity market is currently in an attractive state following poor performance in recent years. MSCI Sri Lanka IMI trades at 8.0x PE and...

Dylan Waller

Sri Lanka: Market Insight

SRI LANKA: GETTING BACK ON TRACK OR JUST BUYING TIME? SRILAN bonds are gradually recovering after successful new loans and swaps. But there is a...

Market Securities (Dubai)

SRI LANKA: Surviving Between a Rock and a Hard Place

In our last report dated 12-May-20, we highlighted the fact that Sri Lanka will not default this year. We also compared Sri Lanka with its closest...

Bondcritic

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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