Singapore's DBS bank outlines trades ideas and strategies for 2021 in rates, currencies and credit

According to Taimur Baig, chief economist of DBS Group Research, Asia is set to outperform the rest of the world as economies in the region look to rebound in 2021 from the coronavirus-induced slump. He told CNBC’s “Street Signs Asia”, that it is a fairly easy set of arguments to be made that given the favorable growth differential, given attractive valuation, Asian economies and markets will attract investor interests.

In a report last week, Baig and other DBS strategists outlined 12 trade ideas and strategies for 2021 in rates, currencies and credit.

Interest Rates

Rates trading has a macroeconomic focus and usually revolves around sovereign bonds and interest rate derivatives. The DBS report listed six trading themes for rates:

Steepening of the US Treasury yield curve, with interest rate on the 10-year tenor likely to hit 1.3% in the latter part of 2021 — up from current levels of around 0.9%.
Betting on Singapore-dollar rates outperforming those of the US dollar.
Expecting Indonesian government bonds to strengthen in value as they are now relatively cheap; DBS analysts see 6.5% as a “decent entry point” in the near term for the 10-year bond.
Flattening in the Indian government bond curve, with the difference in rates between the three-month and five-year segments inching toward 150 basis points by the end of 2021.
Favoring Chinese government bonds that may rebound in the near term as it feeds off the yuan’s strength, with a preference for the five- and seven-year tenors.
Widening 10-year yield spreads between Korean treasury bond and Thai government bond to as much as 70-80 basis points given potential elevated bond supply in South Korea.

Currencies

According to DBS, the US dollar has become “less over-valued,” which means it may depreciate more gradually in 2021. The bank has three ideas on how to trade currencies next year:

Expecting a basket of high-yielding Asian currencies — the Indonesian rupiah, Philippine peso and Indian rupee — to strengthen against the greenback.
Seeing value in the Philippine peso against the Swiss francs and Japanese yen. This strategy has generated stable spot returns of up to 2% and still appears provide “value,” the analysts said.
Predicting the British pound might weaken against the New Zealand dollar given the differing fundamentals between the two economies.

Credit

In terms of investing in debt securities, the DBS analysts favored Asian credit denominated in US dollars. They have three preferred sectors:

Indonesian investment-grade bonds;
“Quality” Indian bank credit;
Chinese real estate and cyclical consumer credit.

DBS said China is set to lead the global recovery in 2021. But investors should be cautious of Chinese companies with higher leverage and poor profitability, the bank warned.