Recent instability in the global banking system will affect Asia to a lesser extent, according to a research report by UBS which remains positive on high-quality AT1 debt issued by local lenders in the region.
More supportive macro conditions and healthy financial institutions are expected to keep the damage from recent instability in the banking system contained within Asia, according to UBS.
«The banking turmoil will likely crimp financial conditions—first in the developed world, before seeping into Asia. Tighter credit could keep consumers cautious and slow the region’s post-COVID growth restart from a 1Q trough,» said a report by UBS Global Wealth Management’s chief investment office.
«The good news is that monetary policy is already on pause, or nearing it across most Asian economies, which should soften the blow.»
AT1 Bonds
Market scrutiny of AT1 bonds following Credit Suisse’s $17 billion write-off will persist, especially relative to non-financial peers issuing such debt. Nonetheless, UBS advises investors to hold on to existing positions issued by top-quality banks.
«This is particularly true for Asia’s national champions, many of which tend to be partially owned by governments and remain fundamentally sound,» the report explained. «We remain engaged in the space, but caution against adding exposure to the asset class for now. Investors can instead focus on opportunities in higher-quality senior bank bonds.»
Q2 Outlook
In broader markets, UBS underlines that «Asia’s fortunes hinge on how China’s revival compares to the depth of the US slump and EU slowdown». It also forecasts a higher probability that central banks will end their hiking cycles «sooner rather than later».
«In fact, markets are already pricing in a Fed policy pivot from July. But investors with cash or expiring fixed deposits should not wait for a final rate hike—which we expect in May—before locking in current yields,» the bank said.
UBS shifts global equities to its least preferred asset class, though it remains positive on Asian markets, especially China, South Korea and Thailand. The bank also continues to be positive on emerging market debt.
