Do you take a portfolio approach or do you just think about individual credits?
Damien Wood: Individual credits. We're bond pickers. We don't have an index or say weight it here or weight it there.
What's your view next year in terms of sovereigns?
Tim Condon: There's value in the Philippines but Malaysia's Petronas is the only one that I have a buy on. Everything else is too tight.
And the budget issue in the Philippines?
Condon: They are working hard to demonstrate to investors it is not out of control. There is a new head of the Bureau of Internal Revenue. Since he took over, revenue collections are up 30% on the year. 2002 is now water under the bridge and investors are focusing on the 2003 budget deficit. In the near-term the bonds face a risk from bombs going off. But I don't think the budget is out of control, and I think they will be able to show progress next year.
What credit rating upgrades and downgrades do you predict?
Korea to single A flat. Korean banks will continue to get upgraded. And Hutch - a one notch downgrade.
Eden Wong: But we think the current price is factoring in a two to three notch downgrade. We think fair value for Hutch 11 should be 210bp over US treasuries.
Why has the market overshot on Hutch?
Wong: It's just negative sentiment on European telcos. In fact, Hutch doesn't really rely on its telecom business to repay debt. Its major core businesses generate stable cashflow and it has a huge cash balance.
Plus a lot of commercial banks are full on Hutch and don't see the need to add to their exposure. And new investors from outside the region are saying they don't know the company that well, and can find better value for that credit rating in the US.
We still have a buy recommendation on the bond and believe it offers good value.
Other themes for next year?
Wood: We think there will be more range trading of bonds. PLDT, the Philippines, and PCCW are all good examples of that. Rather than purely directional trading. That's a challenge for research and will require us to adapt.
Value trades for the next year?
Tony Watson: You probably would look at long-dated Tenaga bonds. It is a triple B issue. It's the state power company and trades well above triple B benchmarks. A lot of the reason is because of a lack of a local bid.
Condon: Malaysia sovereign.
Wood: Thai Farmers
Wong: PLDT
Why so bullish on PLDT?
Wong: We just feel it is a gradually improving credit. I don't think the change in ownership has that much of an impact on the credit improving. They have got the refinancing in place. It's a BB credit trading at 900bp over. And yet it has got refinancing for the next two years in place already - so you're not worrying about the near tem financial risk. It's making positive cashflow and will gradually reduce its debt. So my forecast is the company will improve its credit ratios to a mid to a high BB by 2004, so the potential is there for a rating upgrade. Fair value should be 200bp over the sovereign. Now it is around 400bp over.
Wood: It's a high beta Philippine bond.
Are Asia telco bonds going to be a good story next year?
Wong: We think so. We continue to hold the view that Asian telecoms will remain immune to global volatility. Most of the Asian telcos aren't exposed to 3G and I don't think it will be a pressing issue for them. So really, Asia is still a growth story.
Is there a danger of rising interest rates in the US hitting Asia?
Condon: We forecast rates will rise in the second half of the year as the economy begins to recover and that policy rates are likely to follow, although not match these rises. The impact on Asia will not be that severe. You have strong domestic demand stories in many of these economies, as well as the Asian bid. Rising US rates will have less of an impact on Asian bonds.
