Bonds In Conversation : Scrutinise and Select
In swarms and hordes they come to Singapore, all knowing that their money will appreciate 1.33% in the next 12 months (using latest SGD NEER reading). That was MAS’s promise last Friday in their semi annual Monetary Policy Statement.
We have seen the Non Oil Domestic Exports for September fall 3.4% on the year and electronics exports fall 16.4%. It is just a function of the stronger SGD. I do not think it will have a material impact on GDP given that financial services is expected to boom in the next few months as money continues to pour in from all over the world.
Am I surprised that the ABN AMRO Tier 2 issue yesterday was oversubscribed at a final number of SGD 17 billion ? Not at all.
The bond rallied over 1 dollar this morning suggesting that a 4.5% coupon could have sold as well. No bother with the Statutory Loss Absorption clause.
On Monday, we had a new Olam 10Y senior paper for SGD 400 million which was also well over subscribed for a final coupon of 6% against an initial suggestion of 6.25%. The Olam 7% perpetual done in February suffered some losses as a result.
I have nothing against Olam which counts Temasek as a minor shareholder and is part of the 30 stocks that make up the STI Index. It’s financial leverage is a little worrying at 4.7 times. This means that it is borrowing more than the likes of Golden Agri (1.5 times), Indofood Agri (2.6 times) and even Wilmar (2.9 times).
Nonetheless, the bond is still holding at 100.00 despite having no leverage value.
The credit spread story is selling well these days with analysts calling for compression of spreads and even Bill Gross calling investors to focus on Asia’s local currency bonds. I pulled out some financial sub credit default swaps (“CDS”) to compare to convince myself that things are getting better.
Blue line – Europe Financial Sub Debt (high yielders “HY”)
Green line – Europe Financial Sub Debt (investment grade “IG”)
Purple line – American Financial Sub Debt (IG)
Red line – Asia (ex Japan) Financial Sub Debt (IG)
Note that everything is at a one year low. Yet Europe is still towering above Asia and the US and HY Europe is about 6 times the spread of Asia. If you ask me if this is sustainable, I would say no.
The Greek stock market is smaller than Vietnam now and Vietnam ‘s 5Y CDS is 309 bp (3.09%) against Portugal’s 449 bp (4.49%). The market remains segmented between the safe and the toxic. Can such a situation persist and thrive ? I would say tough. You cannot immunise yourself from the ills of your neighbours and Asia cannot be insulated from the world.
Buying has quite indiscriminate and prices rallying altogether because all is good in Disneyland Singapore. It is time to scrutinise your portfolio and be selective.
Ps : Will do a sub debt special next if resources permit.