Joanne Goh, Equities Strategist

Neel Gopalakrishnan, Credit Strategist

DBS Group Research

Equities: Downgrading Malaysia in favour of Thailand

The Malaysian stock market outperformed regional markets in 3Q18. Most of the 6% rally in the Kuala Lumpur Composite Index (KLCI), however, was concentrated in the Banks. The broader Malaysian market remained lacklustre because of disappointing 2Q18 corporate earnings and slower GDP growth. We have cut our earnings growth from 9.1% to 5.8% and GDP growth from 5.6% to 4.8% this year following the results. Near term, we believe that the upcoming Budget 2019 in November could disappoint. Government spending is likely to be crimped as more debt positions unravel in Malaysia.

Moving northward, Thailand’s outlook has improved relative to the rest of the region. The Bank of Thailand is paving the ground for a rate hike on a recovery that has gained traction. The Thai economy expanded by 4.8% YoY in 1H18. We expect exports and consumption to drive the recovery in 2H18. Fund flows could also return in anticipation of elections by 1Q19. With the wind having shifted in favour of Thailand, we have upgraded Thailand and downgraded Malaysia.

Credit: Opportunities in new bond issues from banks

Recent new bond issues from Asian banks, both in the senior and subordinated debt space, have presented opportunities for investors looking for yield. Two notable recent senior bond issues included BBB-rated 5Y bond deals from a Philippine private bank and an Indian state-owned bank. Both bonds were priced in the mid to high 4% area and offered some rarity value. Philippine banks are not frequent issuers in the market. The Indian bond deal was just the second issuance this year. We consider, in the context of investment grade bonds, the pricing to be fairly attractive.

The week has also seen a couple of SGD-denominated subordinated bond issuances (both Tier 1 and Tier 2). Subordinated bank debt is a sector where we see some value (Monthly dated August 31). Middle East banks have also been active in the sub-debt space with recent USD denominated AT1 issuances from an Abu Dhabi and Kuwaiti bank in the 7% handle. In contrast to high grade issuance, high yield issuance continues to be a challenge for investors with most of the supply coming from repeat issuers, especially out of China. With these issues generally pricing well wide of secondary market levels and, hence, repricing existing bonds, supply remains a technical weakness for the market. The sought-after quality BB issuances are still missing in action.

Joanne Goh

Equity Strategist

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Neel Gopalakrishnan

Credit Strategist

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Group Research

DBS Bank Ltd

Economics Research website

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