12 trade ideas for 2021

Chart of the Week: Value in Asian govt bonds

As per our Asia Rates Valuation Indicator (ARVI), Asian government bonds are generally undervalued compared to US Treasuries. In particular, we think CGB and IndoGB should do well on a total return perspective in 2021, as the global search for yield will continue and the economies of Asia will outperform the rest of the world on a relative basis.

Commentary

Following a tumultuous 2020, what lies in store for global markets next year? Our macro strategy team addresses this question in detail in the annual strategy outlook published last week (click here for the report). Below we summarise the top dozen trade ideas, spanning rates, currencies, and credit.

Rates

1.     Steeper DM curves on global recovery

A likely global recovery ought to drive the US Treasuries curve steeper. We think that neutral 10Y yields at around 1.3% can be hit in the latter part of 2021. Accordingly, we like to pay USD rates on dips when sentiment get dicey. As a guide, we think 10Y yields close to 0.80% offers value for pay positions.

2.     Relative SGD rates outperformance

One way to play the Asia recovery trade would be by betting on SGD rates outperformance vis-à-vis USD rates. The SGD NEER, which has been hovering around the mid-point of the band, would take on an upward drift, putting downward pressure on short-term SGD interest rates in the process. Accordingly, some of the upward pressures on longer-term SGD rates (in line with rising USD rates) should be offset.

3.     Long IndoGB to take advantage of conducive carry conditions

Indonesia govvies screen as one of the cheapest in relative value terms in our Asia Rates Valuation Indicator (ARVI). With the global economy still in the early stages of a recovery and DM monetary policies likely to be accommodative for some time, we think that foreign interest in IndoGBs will return. In the near term, we think 6.5% may be a decent entry point for the 10Y tenor.

4.     Keep an eye on INR liquidity

Short-term INR interest rates are depressed relative to policy rates. Notably the 3M MIBOR is now trading below the benchmark repo rate. We suspect that the downside for the MIBOR may be limited with monetary easing largely done. The 3M/5Y segment of the India government bond curve (at around 207bps) is already steep. We therefore think that the curve may flatten towards 150bps towards the end of 2021.

5.     Normalized CGB yields are more attractive than DM peers

China’s 10-year sovereign bonds appear to be oversold after underperforming US Treasuries for the past six months. We expect a near-term rebound, feeding off yuan’s strength. The Chinese currency has surged 7% over the past six months, among the best performances in Asia. Foreign investors’ fear of missing out on a re-rating of the yuan could boost their CGB holdings. The yuan’s rally drives down short-term interest rates, which also makes it more favourable to hold long-term bonds. Overseas players nibbling at 10-year bonds can help them start to find a base after the steep selloff which began in May.

6.     Wider Korea-Thai yield spreads

The 10Y yield spread between Korean Treasury Bond (KTB) and Thailand Government Bond (ThaiGB) can widen from current 30bps to as much as 70-80bps on relative supply dynamics. Fiscal policy in South Korea is expected to be expansionary for the next few years, even beyond the timeline for full growth recovery from COVID-19. Comparatively, we expect bond supply pressures to remain benign in Thailand.

Currencies

7.     Long IDR, IDR and PHP vs USD carry trade with good interest return

A carry trade using a basket Asia’s highest yielding currencies (IDR, INR and PHP) against the US dollar is likely to keep performing steadily. As per our valuation metrics, IDR and INR are around fair value, while the USD remains over-valued by about 8%.

8.     Long PHP vs JPY and CHF carry trade for stability and low volatility

There is still value in a long PHP position against the CHF and JPY. This strategy has generated stable spot returns of 0-2% with the added benefit of a steady interest return (4% since April). The Philippines has the fourth highest 10-year government bond yield in Asia of almost 3%. Japan’s equivalent yield is near 0%, thanks to its yield curve control policy. Switzerland delivers the most consistent negative yield of around minus 0.50%.

9.     Short GBP-long NZD

The Brexit endgame is approaching with two possible outcomes – a thin deal or no-deal – at the end of the transition period on 31 December. We think, along with consensus, that the GBP to fall by 5% on a no-deal Brexit which may be better expressed against the NZD. Apart from the GBP’s poorer track record vs NZD in December, UK fundamentals are weaker than NZ. Quarterly real growth in 4Q20 is likely to stay positive in NZ and turn negative again in the UK.

Credit

10. Indo IG USD credit looks attractive

Indonesian IG USD bonds may have staged a recovery from earlier declines, but it looks quite incomplete. Our Indonesia investment grade credit index still shows a substantial 100bps yield pick-up vs EM peers. As most Indonesian IG credit relate to state-owned energy, mining and utility companies, sovereign risk is the major driver of their spreads. We think such risk is mostly manageable, assessed from both external debt and domestic debt metrics.

11. Indian Snr Financials USD credit supported by ample capital buffers

Indian senior financial USD credit has seen spreads widening more than Chinese peers, weighed by India’s more severe COVID-19 outbreak, economic slowdown, a rating downgrade to ‘Baa3’, and lingering NPA fears. This gap in spreads presents an opportunity for quality Indian bank credit. Our Indian Financials (Senior) dollar credit index has room to compress further to 180bps.

12. Gain exposure to China’s recovery with real estate and consumer cyclicals credit

China’s newly introduced “three red lines” policy now aims to rein in excessive debt in real estate. Also, a spate of onshore defaults by SOEs point to stretched financial capacity for some local governments in supporting their local firms. The better way of riding a 2021 Chinese domestic demand recovery may lie in seeking exposure to real estate and cyclical consumer sectors. Both sectors have seen spreads widen between 40-120bps year-to-date, and stronger 2021 GDPP growth could drive a substantial compression of their sector spreads, in our view.