Asia Credit Monthly: What if rates keep rising?

Deutsche Bank Markets Research Asia Credit Date 1 March 2018 Asia Credit Monthly What if rates keep rising? ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Harsh Agarwal, CFA Research Analyst (+65 ) 6423 6967 harsh.agarwal@db.com Viacheslav Shilin, MBA Research Analyst (+65 ) 6423 5726 viacheslav.shilin@db.com Karen Kwan, MBA Research Analyst (+65 ) 6423 5387 karen.kwan@db.com Vikash Agarwalla, CFA Research Analyst (+65 ) 6423 5718 vikash.agarwalla@db.com Franco Lam Research Analyst (+852 ) 2203 6226 franco.lam@db.com The worst might be behind us for now, but... 3% was the line in the sand for 10yr UST at the start of the year. It was almost a consensus forecast for year end. It was also the level where the correlation between higher equities and higher rates was meant to break. But, the pace of increase was so quick that even before we got to 3%, many started shifting the goalpost to 3.25-3.5%. Nevertheless, 3% perhaps remains an important psychological level. Going forward, this fast pace might not continue in the very near term. 10yr UST is already 50bp higher in the first two months. Even using the most bearish forecast of 3.5% for year end, the next 50bp move should take 10 months. However, in this Monthly, we analyze the implications for Asia credit of us being wrong and 10yr reaching 3.5% faster than expected. Themes covered  Impact on corporates if capital markets shut down  Which banking system will benefit the most from rising rates?  Low dollar price quality bonds Highest conviction trade ideas  Sovereigns: Buy Mongolia 2023s, Indonesia 2028s Sukuks & 2037s; Sell Philippines 2042s & Buy Malaysia 2046s.  Financials: Buy Woori 2024s (T2) & 5.25% AT1, Mizuho 2.953% 2022s & 2025s T2, Huarong 3.75% 2022s & 4.95% 2047s, Cinda 2028s & AT1, China Orient 2027s, PSBC AT1, Asahi Life Perp, Sirius 2026s, BoChina 2024 T2, ICBC 2.875% 2022s, Taikang 2022s. Sell CITIC Ltd 2027s, BoC 2025s, CCB Leasing 2.75% 2021s and BOCOM Leasing 3.5% 2022s.  IG Corps: Buy Adani Ports 2022s, Bharti 2025s, New World China 2027s; Sell Lenovo 2022s.  HY Corps: Buy Evergrande 2023s, Ruyi 2019s & 2022s, Sunac 2022s, Sell MIE 2019s Key recommendation changes  Sovereigns: Upgrade Sri Lanka 2026s & 2027s to Hold from Sell;  Financials: Initiate on MUFG 2028s with a Buy; Downgrade Woori 2020s, Nippon Life 5% c2022 & ICBC Asia AT1 from Buy to Hold;  IG Corps: Downgrade Chinalco 2021s and 2022s to Hold;  HY Corps: Upgrade Greenland Group 2024s from Sell to Hold, Vedanta 2021s from Hold to Buy. Downgrade Powerlong 2020s & Vedanta 2024s from Buy to Hold. Distributed on: 01/03/2018 03:27:31 GMT7T2se3r0Ot6kwoPa 1 March 2018 Credit Deutsche Bank AG/Hong Kong Page 2 Table Of Contents What if rates keep rising? .................................................... 3 Asia rates and FX ................................................................................................ 3 EM Assets ........................................................................................................... 4 EM fund flows .................................................................................................... 4 Asia credit overall ............................................................................................... 5 Within Asia credit ............................................................................................... 6 If capital markets shut down... ........................................... 8 Debt capital markets ........................................................................................... 8 Equity capital markets ...................................................................................... 10 Rising rates and implications for Asian Financials ............ 12 Low dollar price quality bonds .......................................... 16 Straights ........................................................................................................... 16 Perps................................................................................................................. 17 Changes in recommendations ........................................... 18 Top picks and pans ........................................................... 20 Summary of trades closed YTD ......................................... 30 Initiation on new bonds of existing issuers under coverage ........................................................................................... 32 1 March 2018 Credit Deutsche Bank AG/Hong Kong Page 3 What if rates keep rising? 3% was the line in the sand for 10yr UST at the start of the ye