Group Research

30

29 June 2018

Economics & Strategy Research

DBS Monthly

USD Supreme

Taimur Baig Chief Economist taimurbaig@dbs.com

Irvin Seah Economist irvinseah@dbs.com

Please direct distribution queries to Violet Lee +65 68785281 violetleeyh@dbs.com

• Economics: Between trade wars, Fed policy

normalization, and rising tension between the

US and Iran, 2H18 will likely be volatile,

especially in the FX space. Coming at a time

when global growth has been sound, the risk is

investments get postponed, sentiments sour,

and EM contagion drags down global demand.

We assess the risks around our forecast

weighed to the downside as it is hard for us

conjure scenarios under which trade or

geopolitical tensions ease considerably.

• FX: Our long-held counter-consensus view for a

US dollar recovery has materialised. Most

currencies have depreciated considerably in

1H18. In adding one more hike at the FOMC

meeting on June 13th, the Fed affirmed our call

for four hikes this year.

• Rates: Tightening in Asia officially kicked off in

May and was followed through in June. More

is likely to come as Asia central banks come to

terms that the Fed under Powell is more

hawkish than the Fed under Yellen.

• Equities: Asian markets are likely to be

adversely affected by concerns over peaking

growth and strong USD, as well as rising

domestic inflation and interest rates. We are

therefore downgrading Indonesia, the

Philippines, and Thailand to Neutral in our 3Q

Asia equity strategy.

• Credit: Following the correction over the last

quarter, valuations in Asian credit have

improved. However, until we see sentiment

improving and markets showing more

stability, we would position defensively by

keeping tenors short.

Refer to important disclosures at the end of this report.

Monthly 29 June 2018

Page 2

Economics: DXY Supreme

The focus is presently the rapid ongoing escalation in

trade wars, with signs of real damage surfacing with

announcements of postponed or redirected investments.

To be sure, backward looking data still paint a

comfortable picture with respect to global consumption

and trade, but we think the chance of upside surprises to

the forecast have waned considerably.

An all-out trade war, which we define to be 10-25% tariff

on all products that are traded between China and the

US, could shave off ¼% of GDP to both economies’ GDP

outturn this year, while the damage would be far greater

in 2019, with both countries looking at ½% of more

downside. Considering that China grows at 6-7% and the

US at 2-3%, we believe the damage would be greater to

the US than on China.

Why would the US be hurt more, when China exports

much more (goods exports of USD505bn in 2017,

compared to importing USD130bn from the US the same

year)? Two key reasons feature into our rationale—first,

China’s retaliation will most likely extend to beyond

goods to trade in services and to the operation of US

companies on mainland China. Second, the US is pursuing

trade wars on multiple fronts, extending the skirmish

against its ostensible allies like Canada and the EU. In

each skirmish the US targets different economies and

consumers, but the retaliation from each counterpart

falls on the same group of American consumers and

businesses. The reckoning is in the pipeline, in our view.

Beyond trade-related headlines, the steady drumbeat of

Fed policy normalization continues to support the US

dollar and hurt EM funding conditions. Add to this rising

tension between the US and Iran, oil will remain elevated,

adding to the woes of commodity importing economies.

We are therefore concerned that 2H18 will likely remain

volatile, especially in the FX space. Coming at a time when

global growth has been sound, the risk is investments get

postponed, sentiments sour, and EM contagion drags

down global demand. We assess the risks around our

forecast weighed to the downside as it is hard for us to

conjure scenarios under which trade or geopolitical

tensions ease considerably.

For China, trade tensions are compounding a multitude

of domestic challenges, ranging from deleveraging to

money market liquidity. We see the Jun 24 RRR cuts

reflecting that policy priorities have shifted from

“deleveraging” to “risk precautions” and “growth

support”. Our Nowcast framework shows only a mild

slowdown in Q2 (we are tracking 6.7% growth), but there

is a general sense of unease, manifesting in higher

borrowing costs, weaker RMB, and investment

slowdown. We believe China will stand up to the US in

the ongoing trade skirmish, but there should be no

question that there is no positive to this saga; China’s

businesses and consumers will be hurt by higher tariffs

and other trade barriers.

The recent EM risk-off catalysts include: a) undeniably,

broader dollar strength, as the latter’s rate differentials

continue to widen with its other G3 peers; b) worries

after contagion from a weaker Chinese yuan, which is

catching-up with the weakness in the other Asia ex-Japan

peers; c) lingering worries over the length and depth of

the US-China trade dispute. Indonesia and India face

similar headwinds presently. Investors are clearly

sensitive to economies that face twin deficits, which

underscore the need for ample financing support.

Policymakers now face worries over the classic

‘impossible trinity’; which in a crux is the influence of

monetary policy direction on the respective currencies,

and portfolio/ capital flows. While 2017 was a year of

plenty, the tone has reversed this year. Last year’s strong

capital flows have, to some extent, aggravated this year’s

external imbalances, by a) creating complacency on

financing risks; b) a more dominant presence to portfolio

flows, particularly given the bigger concentration of

foreigners in Indonesia’s debt markets.

Besides policy tightening, currency intervention has also

been ongoing, which in turn is tightening domestic

liquidity conditions. Neither India not Indonesia face

major sovereign financing risks, with India not having any

external public bond issuances and Indonesia’s hard

currency sovereign obligations to the private sector

rather modest. Still, with financial discipline under focus,

and both economies being characterised by twin deficits

which will exacerbate if domestic energy prices don’t

follow international prices, the need to re-assert fiscal

discipline has risen as well.

Taimur Baig

Monthly 29 June 2018

Page 3

China

The People’s Bank of China (PBOC) announced on 24

June a 50bp cut in the reserve requirement ratio (RRR)

to be effective on 5 July. The cut will release RMB500bn

in funds for the country’s five large state banks and 12

national joint-stock commercial banks to finance debt-to-

equity swaps. It will also unleash RMB200bn for postal

banks and city commercial lenders to support small

businesses. The move confirms that policy priorities

have shifted from “deleveraging” to “risk precautions”

and “growth support” (see China’s slowing investment

dynamic, 15 May and PBOC to show greater flexibility, 13

June).

The reduction came against a backdrop of fragile data

releases. In May, domestic activities from retail sales to

fixed asset investment either stalled or missed market

expectation.

Meanwhile, the government’s deleveraging campaign

has started to take a toll on the accessibility to funding.

Interest rates have remained persistently high despite

money injections. The yield premium of 5Y AA- rated

bonds over AAA notes has widened 88bps since March to

233bps; the highest level since July 2016. Also, 22

onshore bonds defaulted hitherto.

The squeeze was compounded by seasonal factors.

Banks have hoarded cash for the upcoming quarterly

macro prudential assessment (paying back RMB2.3tn

short-term interbank debt) and to set aside cash for the

tax season in July.

Further RRR cuts are warranted given large refinancing

needs ahead. In 2H18, a total of RMB6.0tn of bonds and

trust will mature. The amount of medium-term lending

facility (MLF) due in the next 12 months will rise to

RMB4.2tn. A RRR cut is more favourable for banks than

to roll over MLF loans because of lower funding costs

(1.62% versus 3.3%).

The ongoing Sino-US trade tussle is threatening the long

term downward structural adjustment of China’s

external balances. On top of the 25% duties on USD50bn

Chinese imports earlier, US President Donald Trump may

levy 10% tariffs on an extra USD200bn worth of Chinese

goods. Beijing takes Trump’s threats seriously. Trump has

been following through on his election promises steadily

e.g. ditching Iran deal and imposing immigration ban.

Assuming the price elasticity of American consumer

demand with respect to Chinese goods is 2, the proposed

tariffs would reduce Chinese exports by USD65 billion.

Reportedly, some White House officials have been

seeking to restart negotiations with Beijing. China seems

willing to increase its purchase of American goods. During

the recent round of discussions, Beijing offered to buy

USD70bn of energy, agricultural and manufactured

products from the US.

The current account surplus is all set to fall by a

significant amount (it stood at USD165bn last year,

equivalent to 1.3% of GDP). The consequential reduction

in money supply may prompt further RRR cuts to

supplement the credit creation process.

Nathan Chow

5

6

7

8

9

10

11

12

13

May-15 Feb-16 Nov-16 Aug-17 May-18

% YOY

FAI (YTD)

Industrial production

Retail sales

FAI, Industrial production, retail sales

3.70

3.75

3.80

3.85

3.90

3.95

4.00

4.05

4.10

4.15

4.20

-500

-300

-100

100

300

500

700

900

22-Apr-18 22-May-18 21-Jun-18

Funds injected/withdrawn inthe week

1-M SHIBOR (RHS)

Open market operation, SHIBOR

RMB bn %

Monthly 29 June 2018

Page 4

South Korea and Taiwan: Tolerating weaker

currencies

FX volatility in South Korea and Taiwan has risen in the

past week, against the backdrop of a stronger US dollar,

a weaker CNY, and broad-based depreciation in

emerging Asian currencies. The Korean won fell past

1120/USD to an 8-month low on Thursday, while the

Taiwan dollar also slipped past the 30.5/USD mark. Year

to date, the KRW is down 4.8% and the TWD is down

2.6%.

The central banks in South Korea and Taiwan are likely to

tolerate the current bout of FX weakness. The foreign

reserve to short-term external debt ratio remained

strong at 3.3X in South Korea as of 1Q18, and 2.5X in

Taiwan. The current account surplus amounted to USD

78bn in South Korea in 2017 (5.1% of GDP), and USD 83bn

in Taiwan (14.5% of GDP). Given the strong cushions from

foreign reserve and current account positions, the risk of

a vicious cycle of capital outflows and currency

depreciation is relatively low in these two economies.

In fact, the ongoing depreciation of the KRW and TWD

came after the one-way, strong appreciation last year.

The KRW gained 13% vs the USD in 2017, while the TWD

also rose 8%. On the relative basis, the KRW and TWD

were also the outperformers last year – the KRW

appreciated 4% on the NEER basis in 2017 and the TWD

rose 2%. A moderate, orderly correction in their

currencies would be accepted by South Korea’s and

Taiwan’s central banks, given the mounting concerns

over US-China trade tensions and the knock-on effect on

their exports.

We reckon that the central banks in South Korea and

Taiwan will pay more attention to the risk of growth

slowdown than that of capital outflows/financial

instability. Exports and industrial production data in

these two economies have been holding up well as of

May, pointing to steady GDP growth in 2Q. That said,

policymakers would find it necessary to monitor the

upcoming data and assess the impact of US-China trade

disputes. If without successful negotiations, the 25%

tariffs imposed by the US on the first batch of Chinese

exports (USD34bn) would take effect on 6 July. In

addition to the direct impact of higher tariffs on exports,

the prolonged period of trade disputes could also start to

hurt business sentiment and dampen investment plans.

South Korea policy rate forecast (% p.a.)

3Q18 4Q18 1Q19 2Q19 3Q19 4Q19

Old 1.75 2.00 2.00 2.25 2.25 2.25

New 1.50 1.75 1.75 2.00 2.00 2.25

Taiwan’s central bank has turned cautious at the recent

policy meeting on 21 June, emphasising the risk of a 2H

growth slowdown amid external uncertainties (e.g., trade

protectionism, emerging market volatility). Chances are

high that the CBC will keep the accommodative policy

stance at the next meeting in September. We maintain

the forecast for the CBC to hike 12.5bps in December as

a move to normalise monetary policy, while recognise the

possibility of a delay – depending on how the US-China

trade relations will pan out in the coming months.

The external risk factors will also likely keep the Bank of

Korea cautious at the upcoming meeting on 12 July. We

initially expected the BOK to raise rates by 25bps in 3Q

and 4Q, respectively, to preempt inflation. Given that the

trade-war worries have increased and will likely continue

to dominate in the next couple of months, it now seems

that the BOK rate hikes won’t happen so soon. We are

pushing back the call for the two hikes to 4Q18 and 2Q19,

respectively.

Ma Tieying

Monthly 29 June 2018

Page 5

Rates: Tightening follow through

Tightening in Asia officially kicked off in May and was

followed through in June. More is likely to come as Asia

central banks come to terms that the Fed under Powell is

much more hawkish than the Fed under Yellen. It

probably does not help that sentiment for risky assets in

Asia never quite recovered since the first bout of volatility

in February. Between trade wars, higher USD rates and

a stronger USD, the environment remains challenging

for emerging markets.

Respite from Fed hikes is not going to be forthcoming.

The Fed hiked twice this year (March and June) and

signalled another two more to come by the end of 2018.

With the US economy holding up well in absolute and

relative terms (trade tensions notwithstanding), the

hurdle to pause on rate hikes will be high. Moreover, the

European Central Bank (ECB) also stated that asset

purchases are set to end by December. While the ECB’s

tone was dovish, it does not detract from the fact that

policy accommodation is being withdrawn and higher

EUR rates are in store in 2019. Even if trade tensions get

defused, Asia rates still have to adjust to higher

developed market rates.

In June, India and Philippines hiked rates by 25bps each

as the global environment turns much less tolerant of

twin deficits. Indonesia is expected to hike on June 29th.

On balance, these hikes are probably insufficient to

address investor worries with longer-term rates staying

much higher than policy rates. Short term market-based

rates are also elevated amid tight liquidity and increased

speculation of currency weakness. From a valuation

perspective, emerging Asia assets are starting to look

cheap. However, it is probably too early to call for a top

in yields just yet. If USD strength persist, the bias for

interest rates in these economies is to the upside.

Meanwhile, Thailand and Taiwan kept rates on hold. On

balance, we would expect these two economies to be the

laggards (supporting short-term domestic rates) in the

current tightening cycle in Asia. However, some curve

steepening is inevitable if developed market and Asia

rates head north. Price pressures are starting to build in

Thailand and we suspect that a hawkish shift may come

in the coming few meetings. However, the Bank of

Thailand (BoT) is unlikely to match the Fed’s pace in

hiking rates.

If trade tensions worsen, collateral damage would be

felt across Asia (not just China where the tariffs are

targeted). The manufacturing supply chains run across

multiple Asian economies (especially the trade-

dependent ones) and these assets may get re-priced. In

which case, there may be upward pressures on local rates

if the stock market and/or the bond markets sell off to

reflect the deteriorating trade/growth outlook. As such,

events leading up to the tariff implementation on 6 July

bear close watching. Trade tensions is the single biggest

threat to global growth at this point.

Eugene Leow

Monthly 29 June 2018

Page 6

FX: Currency war fears return

Our long-held counter-consensus view for a US dollar

recovery has materialized. Most currencies have

depreciated by the middle of this year. Even the Japanese

yen has returned close to 70% of its gains. Emerging

Asia’s three strongest currencies – the Thai baht, the

Malaysian ringgit and the Chinese yuan – finally gave up

their appreciation this month.

More importantly, our assumptions have been met. In

adding one more hike at the FOMC meeting on June 13th,

the Fed affirmed our call for four hikes this year. With the

Fed Funds Rate set to rise above its 2% inflation target,

Fed has started to roll back its pledge to keep monetary

policy loose indefinitely.

Against a more hawkish Fed, monetary policy

divergences have returned strongly on other major

central banks choosing to stand pat for the rest of the

year. The moderation in Eurozone’s growth led to a

downgrade in its outlook, which in turn, triggered

speculators to pare their excessive long euro positions.

The euro subsequently fell from 1.24 to 1.16 in April-May

and we see it moving lower into 1.10-1.15 on more drag

on the outlook from global trade tensions. Italy’s

populism and Euroscepticism could return to test the

unity and integrity of the single market.

With the DXY Index better positioned to trade in a

higher 95-100 range, we have decided, on June 22nd, to

downgrade our currency outlook. In looking for the euro

to move into a lower 1.10-1.15 range, our end-year target

for the USD against the Singapore dollar was lifted to 1.40

from 1.38. More downward adjustments cannot be

discounted.

This week’s trade war rout in emerging markets have

boosted contagion fears. Vietnam stocks have aborted

its plan to outperform for a second straight year and fell

for the year. The rate hikes in Asia’s three weakest

currencies – the Philippine peso, the Indian rupee and the

Indonesian rupiah – have also yet to arrest their

depreciation. In fact, the rupee has fallen to a new

lifetime low, worse than its Fed taper tantrums levels.

The bitter aftertaste in June was the deterioration in US-

China trade war from a high-stakes poker game of

retaliatory tariffs on each other’s imports into a potential

currency war. Trump’s latest threat to impose tariffs on

an additional USD200bn of Chinese imports into the US

did not lead China (which imported only USD155bn of US

goods in 2017) to fold its cards. Instead, China showed its

hand via the worst monthly fall in the yuan. The 3.2%

depreciation in June trumped the 2.7% fall during the

yuan’s one-off devaluation in August 2015.

Unfortunately, the US has also escalated trade wars with

its other major trading partners such as the Eurozone

and Canada. The odds for trade spats moving on to

negotiations have become low after US President Trump

lashed out at America’s closest allies at the G7 Summit.

Understandably, markets have become less willing to

give Trump the benefit of the doubt on his “on again, off

again” style in fulfilling his campaign pledges ahead of the

US mid-term elections this November. Investors have

become increasingly disillusioned that 2018, unlike 2017,

is not a year of sunshine without rain. Except for its three

weakest currencies, most Asian currencies would

probably await China’s lead in returning some of last

year’s strong appreciation.

Philip Wee

JPY

GBP

EUR

AUD

MYR

VND

THB

CNY

SGD

TWD

KRW

IDR

PHP

INR

-8

-6

-4

-2

0

2

4

6

8

JPY

GB

P

EUR

AU

D

MYR

VN

D

THB

CN

Y

SGD

TWD

KRW ID

R

PH

P

INR

% YTD change vs USD, as of 28 June

Most currencies have given up this year's gains

Sources: DBS Research, Bloomberg data

IN

TW

VN

SG

HK

KR

MY

TH

ID

CN

PH-20

-15

-10

-5

0

5

10

15

20

25

IN TW VN SG HK KR MY TH ID CN PH

% YTD change in benchmark stock indices

as of 28 June

Contagion fears have found its way into Asian equities

Sources: DBS Research, Bloomberg data

Monthly 29 June 2018

Page 7

Equities: Four downgrades and two upgrades

Asia markets are all likely to be adversely affected by

concerns over peaking growth and strong USD as well as

rising domestic inflation and interest rates. We see

higher interest rates and the risk of further growth

slowdown going into next year. We therefore make a few

cuts, including downgrading the Philippines, Indonesia

and Thailand to Neutral in our 3Q Asia equity strategy.

We are not Underweight in these markets as we believe

domestic liquidity should support these markets as

equity valuations are lower now. Given the high volatility

(greater upside / downside) in these markets and

technical indicators that suggest they are oversold, we

think downside risks are quite limited on a 3-month view.

The risks of contagion could lead to downside risks on the

most resilient markets. We are downgrading India to

Underweight while keeping Taiwan as Underweight. We

think there is a risk that India may be the next market to

fall given that it has been relatively resilient, despite the

fact that its currency has continued to weaken. Its

valuations have not fallen like the other emerging ASEAN

markets, and we believe there is the risk of earnings

being cut. In the near term, a technical rebound for Indian

equities may be out of question. The market remains

sensitive to the interest rate outlook, and we think

further rate hikes are possible given the higher inflation

and weak rupee.

The Taiwan market is less volatile compared to other

Asian countries. Room for upside may be limited as its

growth prospects are not exciting and the market comes

with downside risks, in our view. Apple-related stocks are

sensitive to Apple news and we see it as a main downside

risk for the market. Its longer-term re-rating is unlikely

given Taiwan’s strained political relationship with China.

Korea is a Neutral for us. South Korea’s equity market has

always been one of the cheapest in Asia in terms of

valuations. It trades at a huge discount due to North

Korea, so anything significant that comes out of that

country regarding the peace process could have a major

impact on valuations. Near-term geopolitical risks on the

North Korea peninsular should ease after the US-North

Korea summit. The certainly of peace could help lift South

Korean stocks by pricing in possible ‘peace dividends’,

although the gains may be limited by global conditions. In

addition to geopolitical instability, South Korean

companies have long traded at a discount relative to their

global peers due to concerns over corporate governance

and the lack of transparency. Yet recent reforms

including a stewardship code and measures by “chaebol”

conglomerates to trim cross-shareholdings have helped

boost confidence. We believe there is a favourable risk-

reward ratio from investing in Korean stocks at current

levels.

We are highly selective in our Overweight markets as

there are no safe havens in this environment. We like

China / Hong Kong and Singapore. Domestic policies in

these two countries are flexible and remain growth-

driven. Long-term policies are in place to transform the

economies to being services-oriented, and valuations in

these markets have fallen to attractive levels. Despite

fears of the trade war escalating, we believe China/HK are

relatively safe from further sell off as most companies

derive their earnings from the domestic economy and its

valuation has fallen below average for the first time in the

past 5 years.

We have a non-consensus Overweight in Malaysia. We

believe its fiscal and debt concerns are overblown and

could be demystified once a revised 2018 budget and

2019 budget are out later in the year. Events and

developments in the next two years should be fast

moving to make up for the last five years. Meanwhile, the

equity market has corrected together with the ringgit,

but we think the corrections are in line with emerging

market sell-offs and USD strength. Malaysia holds a

positive current account balance, and is a net oil exporter

in Asia, and its vulnerability should be considered smaller

than other CAD countries. AllianceDBS economist (DBS

Group Research JV partner in Malaysia) recently

upgraded 2018 GDP forecast to 5.6% (+5.4% previously).

Private consumption is expected to expand faster at

9.0%, boosted by the 3-month tax holiday before the re-

introduction of sales and services tax (SST). The

estimated RM17bn being relinquished from the

government’s tax coffers will likely translate into higher

disposable income for consumers, thus allowing them to

consume more. This in turn will spur domestic economic

activity with potential multiplier effects. AllianceDBS also

expects price pressures to remain stable throughout

2018 as a result of the removal of GST and proposed

reintroduction of targeted fuel subsidies, further

boosting consumer confidence.

Monthly 29 June 2018

Page 8

Philippines followed up with another 25bps hike this

month, taking the benchmark repo rate to 3.50%.

However, with the real policy rate still negative (headline

CPI is at 4.6% YoY in May) and market-based interest

rates (bond yields and swaps) still at elevated levels, we

don’t think the adjustment (50bps in the current

tightening cycle) is sufficient just yet. The regional equity

strategy team, however believes that with the BSP now

in control of monetary policies to arrest any peso

weakness and build-up of inflation, the outlook is more

promising than two months ago and the current crisis of

confidence should be transient. Investors can look for

inflation and the current tightening cycle to peak in the

second half amid lower valuations and after foreigner

investors have exited this market. We are downgrading

the market to Neutral and would be more positive as

soon as signs of peaking inflation start to emerge.

By contrast, Thailand’s monetary policy remains in an

easing mode to support growth. 1Q18 GDP growth of

4.8% was the strongest in five years but we are concerned

that the peak is behind us in view of the challenging

global trade environment. A high base, high inventory

build-up and slow private consumption growth in Q1

point to downside risks in the second half. The robust

infrastructure plans, after seeing much delay, could

offset the downside risks. Furthermore, Thailand is

relatively resilient to the current EM risk sell-off given its

strong current account balance. However, a negative

carry should suggest further THB weakness. Politics hold

the key to any rebound in the Thai market, where a clear

poll date could help lift domestic investor sentiments. We

expect the election date to be announced soon. On

balance, we are downgrading the market to Neutral and

not Underweight.

3Q18 Asia market recommendations

Overweight

China/Hong Kong

Singapore

Malaysia

Neutral

Philippines

Indonesia

Thailand

Korea

China ‘A’

Underweight

Taiwan

India

Source: DBS Bank. Notes: Overweight — To hold more

weight than the benchmark weight; Neutral — To hold

the same as the benchmark weight; Underweight — To

hold less weight than the benchmark weight

(see Asia strategy: Safety First, 26 June 2018)

Joanne Goh

Monthly 29 June 2018

Page 9

Credit: Value emerging but not conviction

As we head into the second half of the year, we make the

following observations on the Asian credit market:

• Fundamentals are generally sound: Apart from

pockets of stress (e.g. China LGFVs, lower rated

(mainly single B) issuers), credit fundamentals, in

general, are healthy. At the sovereign level, not just

India, Indonesia and Philippines but even smaller

economies like Vietnam have received positive

rating actions in the last six to nine months. Among

corporates, the investment grade and better quality

sub-investment grade issuers have maintained their

fundamentals. The pick-up in M&A activity, even

among sub-investment grade names, is another

indicator. Apart from Indian banks where the issues

are well known, banking sectors are generally in

good shape. The divergence in fundamentals

between the better quality and weaker issuers is also

reflected in the fact that despite the sell-off we have

seen, there are no “screaming buys” as the higher

quality bonds have generally held up well in price.

Greater dispersion in performance of bonds

based on quality (rating)

Source: Markit, Bloomberg, DBS

• Volatility to remain high: Macro factors (e.g.

geopolitical issues including trade war concerns) and

rising incidents of credit events (especially around

liquidity issues in Asian HY) mean sentiment towards

credits is unlikely to improve meaningfully in the

near term. Policy measures such as the recent NDRC

announcements on restricting 364-day bonds and on

use of proceeds of off-shore bonds by property

developers, while positive in the medium term (due

to more primary market discipline) will also raise

concerns over refinancing and liquidity position of

the weaker credits in the near term. Lastly, volatility

in the rates and EM FX environment will also need to

reduce to bring about some stability in Asian bonds.

• Value has emerged: Following the correction over

the last quarter, valuations in Asian credit have

improved. There are more interesting opportunities

to look at today compared to at the start of the year.

However, until we see sentiment improving and

markets showing more stability, we would position

defensively by keeping tenors short. Selected high

grade bonds (especially in the BBB segment), short-

dated BB bonds, and subordinated bonds of

investment grade issuers (both banks (especially

North Asian) and corporates), are sectors that offer

value, in our view. Specifically, on corporate

subordinated bonds, there has been a significant

repricing as markets re-evaluate call probabilities

based on bond structures and issuer-specific

considerations.

Neel Gopalakrishnan

Monthly 29 June 2018

Page 10

RECENT REPORTS

Focus pieces

• PBOC to show greater flexibility

• China: A long-term “competitiveness” strategy

• China’s next play on the trade saga

Weekly wrap / Flash notes

• Indonesia and India: back on the same boat

• China: Deleveraging taking a back seat

• Weekly: Nowcast Update; FX forecast revision

• HKD Rates: The Hibor overshoot

• Weekly: World Cup, Economies and Markets

• Kim-Trump Summit: no surprises, no disappointment

• PBOC to show greater flexibility

• Weekly: The export cycle has peaked

• India’s RBI committee bites the bullet, hikes policy rate

• Weekly: The case for a less fragile Asia

• India: growth, politics, and policy direction

Monthly 29 June 2018

Page 11

Growth, Inflation, Policy Rates & FX forecasts

GDP growth, % YoY CPI inflation, % YoY, ave

2016 2017 2018f 2019f 2016 2017 2018f 2019f

China 6.7 6.9 6.6 6.2 2.0 1.6 2.1 2.2Hong Kong 2.0 3.8 3.3 2.9 2.4 1.7 2.0 2.5India* 8.0 7.1 6.7 7.2 4.9 4.5 3.6 4.7Indonesia 5.0 5.1 5.3 5.4 3.5 3.8 4.0 4.5Malaysia 4.2 5.9 5.0 5.0 2.1 3.9 2.6 3.0Philippines** 6.9 6.7 6.7 6.7 1.3 2.9 4.2 3.5Singapore 2.0 3.6 3.0 2.7 -0.5 0.6 1.0 1.8South Korea 2.9 3.1 2.9 2.9 1.0 1.9 1.8 1.8Taiwan 1.4 2.9 2.8 2.4 1.4 0.6 1.3 1.0Thailand 3.2 3.9 4.0 4.0 0.2 0.7 1.5 1.5Vietnam 6.2 6.8 6.4 6.6 2.7 3.5 3.6 3.8

Eurozone 1.8 2.5 2.2 2.2 0.2 1.5 1.4 1.4Japan 0.9 1.7 1.1 0.9 -0.1 0.5 0.8 1.0United States*** 1.5 2.3 2.6 2.5 1.3 2.1 1.8 1.8* refers to year ending March ** new CPI series *** eop for CPI inflation

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19

China* 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35India 6.00 6.25 6.50 6.50 6.50 6.50 6.50 6.50Indonesia 4.25 4.75 4.75 5.00 5.00 5.00 5.00 5.00Malaysia 3.25 3.25 3.50 3.50 3.50 3.50 3.50 3.50Philippines 3.00 3.25 3.50 3.50 3.75 4.00 4.00 4.00Singapore** 1.40 1.65 1.90 2.15 2.15 2.40 2.40 2.65South Korea 1.50 1.50 1.50 1.75 1.75 2.00 2.00 2.25Taiwan 1.38 1.38 1.38 1.50 1.50 1.63 1.63 1.75Thailand 1.50 1.50 1.50 1.50 1.75 2.00 2.25 2.50Vietnam*** 6.25 6.25 6.25 6.25 6.50 6.50 6.75 6.75

Eurozone 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Japan -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10United States 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50* 1-yr lending rate; ** 3M SOR ; *** prime rate

Policy interest rates, eop

Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19

China 6.28 6.50 6.60 6.70 6.65 6.60 6.55 6.50Hong Kong 7.85 7.84 7.84 7.83 7.82 7.82 7.81 7.80India 65.2 68.0 69.0 69.5 70.0 70.5 71.0 71.5Indonesia 13728 14100 14150 14200 14250 14300 14350 14400Malaysia 3.86 4.00 4.10 4.20 4.18 4.15 4.13 4.10Philippines 52.2 53.0 53.5 54.0 54.5 55.0 55.5 56.0Singapore 1.31 1.36 1.38 1.40 1.39 1.38 1.37 1.36South Korea 1064 1100 1150 1200 1180 1160 1140 1120Thailand 31.2 33.0 33.4 34.0 33.8 33.5 33.3 33.0Vietnam 22775 22865 22903 22970 23022 23074 23246 23177

Australia 0.77 0.74 0.73 0.72 0.73 0.74 0.75 0.76Eurozone 1.23 1.16 1.14 1.12 1.13 1.14 1.15 1.16Japan 106 110 113 115 114 113 112 111United Kingdom 1.40 1.33 1.30 1.28 1.29 1.30 1.31 1.32Australia, Eurozone and United Kingdom are direct quotes

Exchange rates, eop

Monthly 29 June 2018

Page 12

Rates forecasts

2018 2019

Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4

US 3m Libor 2.31 2.30 2.50 2.75 3.00 3.25 3.50 3.75

2Y 2.27 2.60 2.75 2.90 3.05 3.20 3.35 3.50

10Y 2.74 3.00 3.10 3.20 3.30 3.40 3.50 3.50

10Y-2Y 47 40 35 30 25 20 15 0

Japan 3m Tibor 0.07 0.05 0.05 0.05 0.05 0.05 0.05 0.05

2Y -0.13 -0.12 -0.11 -0.10 -0.08 -0.05 -0.03 0.00

10Y 0.05 0.09 0.10 0.10 0.10 0.10 0.10 0.10

10Y-2Y 18 21 21 20 18 15 13 10

Eurozone 3m Euribor -0.33 -0.30 -0.30 -0.25 -0.20 -0.10 0.00 0.10

2Y -0.60 -0.30 -0.20 -0.10 0.00 0.10 0.20 0.30

10Y 0.50 0.80 0.90 1.00 1.13 1.25 1.38 1.50

10Y-2Y 110 110 110 110 113 115 118 120

Indonesia 3m Jibor 5.36 7.20 7.00 6.75 6.75 6.75 6.75 6.75

2Y 5.51 6.70 6.85 7.10 7.20 7.30 7.40 7.50

10Y 6.68 7.15 7.25 7.40 7.55 7.70 7.85 8.00

10Y-2Y 117 45 40 30 35 40 45 50

Malaysia 3m Klibor 3.69 3.65 3.90 3.90 3.90 3.90 3.90 3.90

3Y 3.45 3.70 3.80 3.85 3.85 3.85 3.85 3.85

10Y 3.94 4.20 4.25 4.30 4.35 4.40 4.45 4.50

10Y-3Y 50 50 45 45 50 55 60 65

Philippines 3m PHP ref rate 4.08 4.05 4.20 4.20 4.25 4.30 4.30 4.30

2Y 4.16 4.60 4.80 4.90 5.00 5.10 5.20 5.20

10Y 6.00 6.60 6.70 6.80 6.90 7.00 7.00 7.00

10Y-2Y 184 200 190 190 190 190 180 180

Singapore 3m Sibor 1.45 1.70 1.85 2.05 2.25 2.45 2.65 2.85

2Y 1.79 2.00 2.10 2.20 2.30 2.40 2.50 2.60

10Y 2.29 2.50 2.60 2.70 2.80 2.85 2.90 2.90

10Y-2Y 50 50 50 50 50 45 40 30

Thailand 3m Bibor 1.57 1.60 1.60 1.60 1.85 2.10 2.35 2.60

2Y 1.32 1.45 1.50 1.60 1.80 2.00 2.20 2.40

10Y 2.40 2.50 2.60 2.70 2.80 2.90 3.00 3.00

10Y-2Y 107 -95 110 110 100 90 80 60

China 1 yr Lending rate 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35

3Y 3.56 3.20 3.20 3.30 3.40 3.50 3.60 3.70

10Y 3.75 3.60 3.65 3.70 3.75 3.80 3.85 3.90

10Y-3Y 19 40 45 40 35 30 25 20

Hong Kong 3m Hibor 1.21 2.00 2.20 2.45 2.70 2.95 3.10 3.25

2Y 1.42 2.00 2.20 2.40 2.65 2.90 3.05 3.20

10Y 1.99 2.50 2.65 2.80 2.95 3.10 3.25 3.25

10Y-2Y 57 50 45 40 30 20 20 5

Taiwan 3m Taibor 0.66 0.66 0.66 0.74 0.74 0.81 0.81 0.89

2Y 0.45 0.60 0.60 0.68 0.68 0.75 0.75 0.83

10Y 0.99 1.15 1.25 1.35 1.45 1.55 1.60 1.65

10Y-2Y 54 55 65 68 78 80 85 83

Korea 3m CD 1.65 1.65 1.65 1.90 1.90 2.15 2.15 2.40

3Y 2.22 2.25 2.30 2.35 2.40 2.45 2.45 2.45

10Y 2.62 2.80 2.85 2.90 2.95 3.00 3.05 3.10

10Y-3Y 41 55 55 55 55 55 60 65

India 3m Mibor 7.48 7.00 7.00 7.15 7.15 7.30 7.30 7.30

2Y 6.85 7.25 7.30 7.40 7.50 7.60 7.70 7.80

10Y 7.40 7.70 7.80 7.90 8.00 8.10 8.20 8.30

10Y-2Y 55 45 50 50 50 50 50 50

%, eop, govt bond yield for 2Y and 10Y, spread bps

Monthly 29 June 2018

Page 13

Group Research Economics & Strategy

Taimur Baig

Chief Economist - G3 & Asia

+65 6878-9548 taimurbaig@dbs.com

Nathan Chow

Strategist - China & Hong Kong

+852 3668-5693 nathanchow@dbs.com

Joanne Goh

Regional equity strategist

+65 6878-5233 joannegohsc@dbs.com

Neel Gopalakrishnan

Credit strategist

+65 6878-2072 neelg@dbs.com

Eugene Leow

Rates Strategist - G3 & Asia

+65 6878-2842 eugeneleow@dbs.com

Chris Leung

Economist - China & Hong Kong

+852 3668-5694 chrisleung@dbs.com

Ma Tieying

Economist - Japan, South Korea, & Taiwan

+65 6878-2408 matieying@dbs.com

Radhika Rao

Economist - Eurozone & India

+65 6878-5282 radhikarao@dbs.com

Irvin Seah

Economist - Singapore, Malaysia, & Vietnam

+65 6878-6727 irvinseah@dbs.com

Duncan Tan

FX & Rates Strategist - ASEAN

+65 6878-2140 duncantan@dbs.com

Samuel Tse

Economist - China & Hong Kong

+852 3668-5695 samueltse@dbs.com

Philip Wee

FX Strategist - G3 & Asia

+65 6878-4033 philipwee@dbs.com

Disclaimer:

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations)