BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

Hello, everyone. Welcome to S&P Global Ratings Fourth Asia Corporate Virtual Conference. For 2024, we have the theme of China's New Year, Asia's New Cycle. My name is Vera Chaplin. I'm the Asia Pacific Ratings Regional Practice Lead. Some of the top risks that we're monitoring include China's growth momentum, the rate cycle change and how that may impact the financing conditions. The noncorporate -- nonfinancial corporate landscape are evolving with cyclical and sectoral developments. The corporate operating environment are further affected by geopolitics and local political dynamics. The credit outlook are nuanced by regions, by sectors and by credit fundamentals of entities. So who may be the winners and losers? Our senior members of S&P Global Ratings Asia Pacific Corporate Ratings team alongside with distinguished panel of industry experts will share their insights and outlook on our global top risks and trends to regional differences in performance expectations. I would like to thank them in advance for their time and their insights. I'm glad to see the convenience of virtual conference of our flagship event has created for speakers and attendees. It has enabled us to bring experts around the world to create content, rich forum for us to have discussions. We are very pleased to have close to 1,900 people from 37 countries joining us today. We thank you for your engagement, and we're very committed to transparency, and we'll continue our effort to provide insight for research and forward-looking opinions to the market. I also want to thank many of you who have submitted questions in advance. We hope you will find some of the insights will relate to your questions in today's discussions. Or you can find, hopefully, in your future, special topics, publications and webcasts that will address some of your questions. Just judging by the interest of the questions, I would encourage you to actually watch a replay of our webinar held on January 30, titled Asia Pacific Sector Trends 2024, Geopolitical Uncertainty Colors Prospects, where S&P Global Ratings senior credit analysts actually discuss how latest developments will shape Asia Pacific sectors in 2024. So many key sectors were covered in this webcast. It can be found on our website, www.spglobal.com, under Events and Webcast Replays. And I would also refer you to our periodic publication, Industry Top Trends update for 2023. This report provides 1-page update, summarize our evolving views on many sectors, I believe about 56 sectors in Asia Pacific, Europe and North America, focusing on what's changed, what's to look out for and what are key risks to our baseline scenarios. They are drawn from our assessments of around 5,000 rated corporates and infrastructure entities. So for those who are interested in details, it's good to follow these updates. So finally, I hope you will enjoy the conference and that you will have plenty of valuable takeaways. Please help us improve the relevance of our communication to you by completing the survey at the end of the conference. We would love to hear your feedback and your topics of interest and questions that are at top of your mind. So as I draw my opening remarks to a close, it is with great pleasure that I introduce Chris Lee, our Asia Pacific Chief Analytical Officer, who will be guiding us through the first panel discussion on risks and opportunities in the new cycle. Chris, the floor is yours. Thank you.

Thank you, Vera. Thanks for the introduction. Good morning. It's a great, great pressure to be the moderator for this panel. Let me introduce our well-known speakers. We have a stellar cast today. So we have Gregg Lemos-Stein, Chief Analogical Officer for Global Corporates; Lim Soo Chong from JPMorgan Securities, he is the Head of Research; and Jenny Zeng, the Chief Investment Officer at Allianz Global Investors. So we have a lot to cover today. We'll start with Gregg giving us a global overview. And after that, we'll go into the panel discussion. So Gregg, the floor is yours.

Well, thank you very much, Chris. Thank you, Vera. Thank you all for having me. It's an honor and a privilege to join us this call with many, many participants. We have a wonderful turnout. And I hope to provide a little bit of global perspective. As Chris said, just to start things off, I'm currently in the New York area. So I'm on the other side of the world. We can -- I'll give the global context. And maybe later on, we can sort of talk about regional distinctions. But if we go to the next slide, please. Overall, the credit look is surprisingly sanguine in a sense. We've had more resilience than even I would have thought in terms of the macroeconomic picture. There are regional distinctions again, which we'll get into, but it seems like a lot of economies are heading for softer growth but not necessarily a recession. And we're getting that sort of soft landing that we were hoping for after some overheated economies and high inflation. But generally, things are better. The markets are -- market liquidity is there. Refinancing can get done. The macroeconomic environment seems supportive despite the very, very high borrowing costs, which are putting a break on the economy, but I guess not too abrupt to halt. Now we do expect defaults to continue to increase this year globally. They have been rising for the last year, and we expect that trend to continue. There's a bit of a lag effect, which I can get into. And we do expect even soft landing is softness, and so we think that there will be softer growth and still high borrowing costs for particularly low-rated credits. So that's going to be something I'm going to harp on, is that lower-rated credit is going to be a divergence in credit performance from the low end of the credit spectrum on one hand, an investment grade which should be in a much, much better position. But risks remain high. You're aware of these. None of these should be a surprise. But there is still a narrow road for central banks to weave through with the interest rate cycle changing and inflation still not gone. And in fact, we still see labor costs in many jurisdictions still a pressure. But yet if the central banks are too firm for too long, then we could see a weaker business situation and market liquidity, which is key because this year is pivotal because we see a lot of maturities, particularly for spec-grade issuers in 2025, particularly at the second half of 2025. But overall, it's a different world that we're in now. We have tighter financing conditions, at least more expensive financing conditions. We have geopolitical risks that have heightened, not abated. And we have the ever present challenges from climate-related risks. Technology transformation is faster than ever. So there's a lot to keep in mind as governments and issuers navigate this new reality. If we go to the next slide, please. So this is the main issue. I picked SOFR, which is a rate that a lot of U.S. borrowers and others are based on. But really, it's a similar picture globally, just maybe differences in degrees. But we had essentially 0% rates as early as 2 years ago -- 3 years ago. And now you've got that base rate, that SOFR rate in the U.S. is still at 5% -- over 5%. And why does that matter? Because actually, a lot of highly levered entities who set their capital structure before the spring of '22 added more leverage than they would like to have these days. So even though financing costs are coming in a little bit, they still remain quite high, and that's going to be a challenge. Investment grade should be able to weather this difference. So one stat that might be helpful is that for B- credits, issuers that we rate B- or lower, their free operating cash flow into debt historically has been less than 5%, really in the 2.5% to 3% range. And if you see this increase in borrowing costs, that actually wipes out all that cash flow, whereas an investment-grade issuer might have 20% to 25% free operating cash flow to debt. So it's an annoyance. It's something that they have to deal with, but it's not existential. If we go to the next slide, please, continue on the theme of rates. You see on the left here, we have cash interest paid over the trailing 4 quarters, sorry, for the typo, 4 quarters year-over-year. You see how rapidly that increased, and it's going to remain high. And by the way, it's not decreasing. That's the percentage increase year-over-year. So even though it looks like it's declining, it's still increasing very, very rapidly. And that's what I mean. That is a lag effect of the much higher borrowing cost as more companies refinance. And on the right, you see refinancing for loans and bonds, a lot -- not a whole lot left to do in 2024. So that's not the issue. It's really 2025 where it steps up in the second half of '25. And in spec-grade world, we do expect companies to handle their maturities about a year in advance. And if they can't, they often throw in the towel not on the day of the maturity but in advance. So that's why we expect defaults to bump up, at least in the U.S. and Europe, in the second half of this year. I'll go through quickly the next several slides. This shows global rating actions. Still negative. You think, well, with the good economic situation, good market liquidity, why do we still have more downgrades than upgrades? That heavy line that's trending down is the cumulative actions, whereas each bar is each week. So rates are not falling off a cliff by any means, but they're persistently negative. If we were to show the same slide for investment grade though, it would be much flat. So we're not seeing a prevalence of downgrades in investment grade. It's more company specific. It's really the B- and CCC credit, some of them heading into default that are causing these rating actions. And then a little bit on sectors before I hand the mic back to Chris. We do see generally consumer-facing sectors and those sectors where there are a high degree of labor cost, where labor costs are pressuring overall profitability. Those are the recipes for weakness, whereas some of the commodity sectors in oil and gas, which have been often the week links, have been much stronger. Consumer products, health care and high tech have had the most downgrades. They also happen to be the credits where there have been a lot of very, very highly levered entities, a lot of B- credits that came to market over the last decade really, particularly in the last 5 years, and that's where those -- they have more problematic credits. So I'd say even for consumer and high tech and health care, if we're talking about investment grade, it's a different story, not as negative. And then if we go to the next slide. I think it's important to just call out real estate because it's kind of a sector onto itself. You in APAC -- you in the Asia region, you know about the real estate issues that have been around for quite some time, exacerbated by interest rates, of course. I would just like to call attention to the office market, which I think is a particular problem in the U.S. It's a problem globally. But in the U.S., the back-to-office trends have been weaker. Utilization of office space is much lower. Vacancy rates are higher, and therefore, valuations are lower. So we see a lot of problematic commercial real estate workouts that need to be done, ratings downgrades for the companies we rate. And we're keeping an eye, of course, on the banks, which have a lot of lending to commercial real estate entities. So this is a different context because I think in the region here in Asia, you're back to work more in the office. So Chris, that's the overview in as short as I can keep it. Back to you, please.

Thank you very much, Gregg. That's a great overview. Some really interesting tidbits that we can bring in for our discussions later on. So let me start with Soo Chong. Soo Chong, this time of the year, we are all looking forward to a new year. Last year has been pretty bad for the Asia bond market towards the end of the year. There was a brief reprieve, and then we start the year with some issuances, and spreads are now very tight for both high yield and investment grade. It seems like consensus call is for interest rates to go down -- to be cut this year. That seems to be the consensus. Is the market ahead of itself given the risk that Gregg mentioned? What are your thoughts?

Yes, I think just to -- first of all, Chris, thanks for inviting me to speak at your forum. It's great to join you. In terms of how we see the market, yes, I mean, to some degree, I think you can look at the rally that we've seen towards the end of last year. The market maybe is pricing a bit ahead of the -- what the Fed could do. I mean the market -- I think towards the end of last year, we are talking about a Fed rate cut is going to be marked, and that's really what we have to call back our expectations. Our -- my guess is also if you look at all the data that's coming out, I mean there are some -- we have to be mindful. I think the data point and the turn of the cycle -- of the e-commerce cycle tend to be more easier. And also, I think investor cannot overreact to somebody coming out. Our view for JPMorgan is still that we are going to have a first rate cut in June. They have not changed. So that's something that the market seems to be more focused -- I mean can move the expectation to that kind of timeline. And still, I think there is still a couple of employment data and also inflation data before the fed is going to make decisions somewhere in June. So that's still -- we are quite comfortable with that assumption. And for the full year, I think we are talking about close to 125 basis points cut for the full year for this year. So that's going to be very positive in the market overall. But having did that, I mean, what is the downside scenario? What if this Fed rate cut had been delayed further? The one thing to highlight, that's one thing you look at the market. I think, yes, we can talk about spread being tight. And to some degree, look at U.S., it is historically tight. For Asia, we are slightly inside of the historic average. We are not near the historical target. But obviously, I can't say that this is cheap. But if you look at yield, all in yield for the market as full. You look at how elevated the yield is today compared to -- that is still, you can say, at the higher -- the top end of the market. We are moderated from the 8-odd percent in -- 2 years ago. Now it's about 6.5%. But 6.5% for BBB+ index, that is not really bad yet altogether. So that's something to think about. And this is what it really to be -- to keep that in mind, all-in yield is still quite elevated. And also, the other thing to think about, that this market, if you compare to the -- onshore rates, I think I think you're talking about India, you're talking about China, you're talking about other country in this region, that kind of yield is still going to be a big year pickup over the local currency. So that's another thing to bear in mind. I think it still looks attractive. And even we take 6.5%, that's really on the [ Jackie ]. But even you talk about just purely on the investment side, all-in yield is still 5.5%. That still looks very reasonable for -- we can say that it's about 7 years tenor and -- which is single A- credit indices. And those are numbers that we should bear in mind when we look at the market. I'm going stop and hand over to you.

Thank you, Soo Chong. So let me turn to Jenny. So you heard Soo Chong. We -- the things that I picked up is we are in a turning point. Whether this is a real turning point or it's a false turn, what are your thoughts? And also, what do you think about inflation pressure persisting?

Good morning, everyone, and good afternoon and good evening. And first of all, I want to wish everyone a happy and lucky year of dragon. We probably really need that, particularly for this region. So I will answer your second question first, Chris, on inflation because Gregg just also touched on very briefly the stickiness, the potential stickiness of inflation, right? So this is something also we're watching very closely, basically the last mile of inflation in the U.S. Now currently, if we look at the balance of data favors continued this inflation through 2024 in the U.S. Of course, if that turns out to be the pace the Fed will likely cut rates this year regardless of strong job market growth, right? Because at the end of the day, it's inflation. It's price stability, the institution -- managed institution. Now so -- however, it is also possible that the growth -- both growth and inflation prove to be similar in the middle this year, i.e., not strong enough to push back up materially and -- but not weak enough to put them down much either. So it could be that there is a scenario that we're in this middle part in terms of both growth and inflation data. In this scenario, if this happens, the market may switch its attention back to supply-demand of the U.S. treasury market. Now if you remember last year, we started from debating on growth and recession and inflation. And to certain -- at some point last year, the market is starting to focus on the supply of U.S. treasury. This could happen again, in fact, this year. When people started to see -- actually, there's no -- the deviation of inflation and growth data in the U.S. may not necessarily be as dramatic as what people may think so as to lead to certain actions. Then the attention will be focused back on the physical side. So that's number one I want to talk about. But then how that will impact the U.S. treasury and how much that kind of impacting treasury yield will be, in fact, less clear picture this year. But overall, we do think for this year, at least what we do have high conviction on is the volatility of the U.S. treasuries coming down and also the range of U.S. treasury. The trading range of U.S. treasury should come down significantly versus last year. That provides a benign environment to take tariff risk overall for credit. Yes. Okay. So that's your second question on inflation. The first question on the turning point. We were talking about turning point. We're talking about 2 things. One is the fundamental turning point and 2 is the flow timing point. The fundamental turning point, that's mainly on China, I would think, right? But we're talking about whether there is a turning point. And I'm sure that we will get into the details of that later. But we do think at least there is a clear shift of policy landscape in China that can lead to a fundamental turning point. On the flow side, less quick. So let me give it back to your first, Chris, before we expand on those points.

Okay. So Jenny, thanks for elaborating on the turning point and touching on China. So I was more interested in terms of turning point for inflation because we see inflation increasing the way they have. It's extremely sticky. And it's not easy to take inflation to come back down, and then expectations already started to build it into labor costs, and compensation price increases is across board. So is it really a turning point or this is a false turn? That was more my question. If you can give a brief, yes.

Yes, you're absolutely right, Chris. This is what we have been debating for. That's one of the key debate topics that we have internally as well. I mean if you look at the long-term demographic considerations in the U.S., which actually suggests really it should continue to rise as the baby boomers draw down their retirement accounts, right? So that itself actually is very inflationary. And also, if we look at the fiscal side, the fiscal deficit. U.S. at the end of the day, someone is going to finance that. And that's also inflation, right? The rising populism in most of the Western democracies, that itself is inflationary. And also, of course, we can also touch on the deglobalization and all the ESG initiatives. All of them, in fact, are inflationary. But of course, on the other hand of the story, we can also have productivity growth. And we have tech, which is disinflationary as well. So we do have both force in that. Now the question is -- to me, the question has always been -- we were talking about the disinflationary trend in the U.S. And we're talking about the U.S. inflation going back to average 2% plus Fed is targeting average 2%. The Fed is not targeting 2%. It's targeting average 2%. What's the time line of that average 2%? That's number one. And two is, do we need to get to 2% so as for Fed to cut rates? Or 3%, that's sufficient enough, right? So these are all the details of that. But again, we really need to see, I think, the data. And another issue is we know that inflation expectation usually is a lagging indicator, right? So all this together, I have to say that that's probably one of the most calls that we can make this year.

Okay. Sounds like the Fed has some very sophisticated way of saying about average 2%. So anyway, Gregg, what is our house view on interest rate cuts just for us to round out this discussion around interest rates? So we heard from Soo Chong and Jenny. They are expecting interest rate cuts this year.

Yes, we do. Not immediately, but at some point during the year, we think the Fed will start cutting rates. And we expect, I believe, 3 cuts this year and some more in 2025. So that, keep in mind, is our base case. And in a way, it's kind of a Goldilocks scenario because if there are more rate cuts than that, that means something is really problematic with the economy. And if there are less rate cuts than that or fewer, that means inflation is still rising it's ugly head. So -- but our base expectation is sort of that sort of base. It's not that far off the market consensus. I think S&P's economists were pretty early in that forecast for Feds, but now it's more in line with what everybody expects.

Okay. Thank you very much. So let's move on to a separate topic, related, which is the credit cycle. Soo Chong, perhaps we could start with you. Where do you see the credit cycle? Where is it at? Your expectation of defaults for 2024 for Asia? Are you on mute, Soo Chong?

Okay. Sorry, I think you can -- our view is that credit cycle have probably seen the worst, yes. We are not talking about sharp recovery from here, but we do expect that if you look at some of the key parameter that we want to ideate and talked about before, we're talking about [indiscernible]. Those are -- they have moderated. And then that trend is going to continue into 2024, yes. There's no doubt, I think some of the risks that you highlighted, [indiscernible], economy slowdown, the China property problem, LGIP. Those are macro headwinds that will be still in some kind of schedule over the credit. But if you pick further, if you look at the rating action last year, there's no doubt, I mean, we see more downgrade than upgrade. But you look at the downgrade that we have seen in either investment-grade side, that's really highly concentrated in 3 area, which is China property, China LGIP and AMC, yes. And that 3 segments together accounted close to 80% of the downgrade you see. So outside of that 3 area, I think the damage is actually quite muted to some degree. And that is something that we have to bear in mind. And the other thing also, if you look at even the [ ID ] side, the China property plus China high industrial, that together accounted for 70% of downgrade in 2023. So those are -- we have to understand that macro headwind is back, and we are not saying that the macro headwind had become a tailwind for the credit. But I will say that the damage is still going to be well contained for Asia. Now if you look at credit metrics, for example, the investment-grade investment credit, yes, there's some deterioration. There's no doubt, but we are not talking about a significant deterioration to be -- to cause some alarm. And the other part is probably that the ownership structure of a lot of this, yes. You look at Asia per se, I think you look at [ Jackie ] market cap as an indicator, close to 60% of the issue are causes of government sovereign or you can see government-related entities. So those are credit. They're trying to benefit somewhat from their ownership plus government ownership. So as long as the credit metrics don't deteriorate significantly, their rating is still to be intact. And that's really what is really helping us why you look at all the macro headwinds, the rating pressure has been quite muted. So come back to the other [indiscernible]. I think last year, we see about 2% of the injuries. That's down from 3.2% in 2022. And for this year, we do expect that, that trend will continue. If I just look at all the, you can say, bottom line credit, they have a negative rating outlook. There's a potential to be a [indiscernible] but the tail is about 16 billion, which is not -- because that number, I think out of that 16 billion, I don't -- we don't expect all of them to default -- sorry to become invest -- high yield. Probably maybe half of them. This is the max I can think about. And that means that the following rate is still going to continue from last year number. For Q4, we are also seeing a similar trend. We have definitely seen the worst. We have seen default that's trending about 13% to 16% in 2021, 2022, and that go down to 6% to 9.5%. Obviously, that's still too high. For this year, we expect that trend to go down to about 4.5%. And that still also is highly concentrated in one single sector, which is China property. And still some of these will also -- so to some extent, if you look at all the data, we will say that the worst of the cycle is over. Yes, the macro headwind is there, but we don't think that the rating pressure are going to significantly worsen for the year.

Yes. Soo Chong, thank you. Thanks for that. So I just want to touch on something you brought up, which is the concentration of the defaults in China property and all of the downgrades last year around the AMCs and also LGIPs. But outside of this group, if you look at high-yield industrial for China, for example, or Southeast Asia, are they -- have they been shielded or been insulated from the stresses in the broader high-yield market? Or that affected the Chinese property bonds?

Actually, obviously, they are not. I mean I cover Indo. Indo is a space that you have a lot of default. I mean to -- and also downgrade risk. I mean that's something to be mindful of. You look at the downgrade. Now we talk about 70% is in China high-yield property and industrial, yes. And that 20% actually come from the downgrade in the high yield side. It's actually in the China -- Indonesian property space. So that is the segment that has seen quite a few downgrade risk. And that's something in my point, and that's from -- in terms of number, that's small, but that is also kind of telling you that the pressure is still there because of refinancing this year. So if you talk outside that, I would say that the default risk is actually quite in great form, except for these few sectors that we talked.

Yes. What is interesting is if you look at the public bond market now, I mean, the overall, we are talking about a bigger concentration and high investment grades. And are you just -- high yield has been estimated in terms of the number of bonds outstanding for the public bond market.

You're right. I mean we can also look at the asset further right now. You use [ Jackie ] as a benchmark. 85% of the issuer is actually market capacity in S&P. So only 15% is high yield, yes. And within the 5-year space, you can say the concentration now is markup, which we all know is improving credit story. And also, you have -- and the other one is India. India, except for some commodity -- one commodity name, the high consulting in the infrastructure and renewal. Those are sectors that is quite stable, or to some degree, they are still improving. And then outside of that, the other main segment is actually Philippine corporates. These tend to be -- you can say the household name. There are some extension risk for some that have been issued. But besides that, there are other really a lot [indiscernible]. The answer is no. So that's -- you can go on. And then the only one that probably is something to monitor, some smaller developers graded in development in Hong Kong. Those could be the potential risk area for us. But outside of that, I can't really think about anything that's really sticking out as something that we have to bear in mind.

Yes. So property always worry us, yes. Jenny, I want to bring this question to you. You and I started looking at property many years ago during the growth cycle, and now they are in the down cycle. What are your thoughts about property? If we look across Asia, this is one sector that has thrown off the most number of defaults. Not just in China, but you look at Indonesia as well. I mean Vietnam had a similar issue. Even recently, domestic market in Korea, we saw some default in property. So what is the common threat here among all the developers that have defaulted, whether it's in China or Asia?

That's a really, really good question, Chris, because this is the thing I keep telling to my clients, that property default itself or property down cycle itself is not uncommon. It's not unique to China. I mean we've seen this many, many times in many other economies around the world. But I do want to say that there are some uniqueness of this China's property prices. There are some reconcilable paradox that we've noticed, we observed in this market. Just for example, last year, everybody knows that the primary sales is down double digit, right? So we're pretty much from the 18 trillion in 2021, we're already around 13, 14 now, right? So primary market is one way. It's collapsed, and we believe it will continue to go down, in fact, to a new equivalent market. However, if you look at no matter it's last year or year-to-date or during the Chinese new year. Secondary transaction is up significantly. Last year, secondary transaction is up 30%. The Chinese new year, primary is down 40 something, and then the secondary is up 70%. So as I keep telling people, so in what property market prices that you see people still buying primary but to buy secondary, right? So to a certain extent, given the stage of the property market in China, this still need to -- there will continue to be organization. There will continue to be upgrading demand, so which means the property demand is not property demand prices we're talking about right now. It is a little bit of oversupply issue. But that's -- again, that's common in every property prices. But I think the heat prices we're talking about here is the presell crisis. It's the crisis in the primary market, i.e., the homebuyers are saying, I don't want to take credit risks anymore. And also this is why this is the case. It's because only in that market, in China's market, the presell system requires home buyers to put 100% of the transaction -- of the value of the property at day 1, right? Again, presale system itself, it's not uncommon. We have it in the U.S. We have it everywhere in Singapore. But usually, you put down a deposit, and you pay according to construction progress, right? But in China, you put down 100% on the day 1, i.e., from homebuyers' perspective, they are taking 100% of the credit risk on their balance sheet of the developers. So now what they're saying is -- the homebuyers are basically saying, yes, I still have -- because price is adjusted, maybe it's a little bit more affordable. So I still want to buy properties, but I don't want to take that credit risk anymore. So I'm going to the secondary market to buy. It's actually -- I think that's a uniqueness of this crisis. Now this is almost like a bank run to a certain extent. This is also the reason why if you look at the policies that we have right now, the traditional demand side obviously is not going to work. When we have a bank run, the only policy that will work is backstop that. So here is backstop the development. It's added some cost now. So this is also the reason why we started to see a shift of policy mentality from the regulators from -- I think particularly after the central financial work conference last October. That's the first time ever that they said, okay, first of all, equal treatments, and that's very, very important, of all developers. That's number one. And then after that, they came up with all the support to developers and the white list on the projects just to restore that confidence in the primary market. That will be the only policy that's going to work. And then they will need to continue to do that. Otherwise, cut mortgage rate and this and that, it's not going to help the primary market.

Right. So if I hear what you're saying, it sounds like if we look at the data, we should be really focusing in the secondary market where that is showing where the real buying power is because the primary markets, as you mentioned, has basically collapsed. And the confidence has gone until -- unless we have a very forceful government action in terms of backstopping the developers from going under and the completion -- making sure the completion is done. Okay. Thank you for that insightful take on the China property. Let me go to Gregg. I just want to touch about refinancing risk, and then we can go to a discussion around regional markets in Asia. So Gregg, you mentioned about the maturity walls in the U.S. If I look at the chart that we presented, the wall is still rising all the way to 2026. And you talked about default rates, that defaults are still growing. So are we going to see defaults peaking sometime in '26 before it comes back down. Is this your expectation?

Sure. I think our expectation is the peak would come before that. And actually, we're not that far away from the peak. It's going to continue rising this year in our view. But to use a metaphor, maybe we're in the seventh inning of the default wave. I like using baseball references for Asia, by the way, because you understand it. Depends on where you are. But it's a period of adjustment. And even though there are more maturities in '26, keep in mind, a lot of that is things that have been sort of priced in. So it won't be as much of a delta, and there's a lot of floating rate debt out there that has already felt the brunt of the increase. So we think that the period of adjustment will sort of be past us maybe after -- into next year. And not -- now the big wildcard is whether some exogenous factor causes credit spreads to go massively wider because they've been going in the other direction. Credit spreads are impacted -- incredibly tight, which has been kind of a saving grace here for that. But no, we don't expect defaults to continue to rise for 2 more years. We think it will be just basically this year. And in context, they're not as high as they were at past like default cycles. Usually, it would go into the 10% of spec grade, but it seems like maybe we have a new normal where defaults are higher than the 1% or 0%. But they're more in the middle of that range of 4% to 5% for a while.

Right. So do you think that we're going to -- default rate will pick at around 4%, 4.5% to 5%, thereabouts?

Yes. 4.5% in Europe and 4.75% in the U.S. And actually, we're just above 4% currently. So it's going to plateau, go a little bit higher. But we're already feeling the pain.

Okay. So defaults are still rising. Default rates are still going up. That's the U.S. trend. So in Asia, it's the other way around, which is ebbing or improving or reducing. Okay. Thank you for that. Let's talk about regional markets before we talk about risk, op risk. So Soo Chong, can you give us some -- your perspective about China versus non-China, developed versus emerging market, Asia? Where do you see opportunities? And what markets?

Well, I think we have seen opportunity where China is [indiscernible]. Well, China, obviously, there's a lot of that. It's not -- you have one after another, China property, LGIP and all these things keep on popping up. And all this job [indiscernible] is another one that you want to monitor and bear in mind. But if you look at what -- how China credit has performed, that would be something that's interesting. If you kick out the China, look at China investment grade per se, you strip out China property. I think the investment-grade -- China investment grade credit have actually turned in about 7% to 8% of total return last year. That is not bad for investment-grade credit, and that's actually outperformed a lot of other sectors. So is it -- why is -- why this area so strong? I think that's one thing that we should not forget. There are the demand, the technical side is we got -- the technicals are very strong. If anything, we definitely still see a lot of demand from China on -- for commercial bank. That is that they have deployed the -- on the foreign currency deposit, they can be lend out in onshore, and that's -- those are flowing into the market. If anything, the demand is overwhelming that some of this demand has spilled over to the DM side. So that's -- you look at what we are seeing over the last 1 to 2 years, Chinese bank are just stepping out the acquisition of DM bank paper, and this is what is happening. And that also show you the current demand that you are -- you should expect from China. And this is why despite all the headline that you've seen, China credit has actually performed quite recently. And they would -- I think -- and that's still the case going to be for this year, that we are -- we don't really expect them to deviate too much from the performance on the -- from the other's investment grade in this part of the world, so -- and even compared to [ GM ]. So you can say that's really widening up because of some geographic noises. I think what you're going to see, I think you see that Chinese account which is to step in to take it up. And we have seen that playing out, right? The last 1 year, we have seen 1 or 2x that you have all these sanctions. New sanctions came about, any more of this market actually has shortened. Last time, it took 2 to 3 weeks for the for the market to absorb the news, right? Right now, it could be, say, a few days. And suddenly, market is back to normal even after the sanction news is announced. So that actually show you the technical story that we had. China credit is benefiting. So in the region, obviously, most people are -- most favorite country is India. And that is where a lot of people -- we've seen a lot of investor interest. I mean just by the way, India corporate is the only -- India is the only segment in the country in Asia that global investors have over decision. And that's the only one. And the other country are mostly underweight to a different degree. India is the one that -- one single country that have always there. But also, if you look at regional perspective, it's hard to really pound the table on the investment-grade side because of the valuation, where they are. They are trading just 10, 20 basis points inside of China, which is just despite the fact that there are not just a rating differential right? So for India, we will probably go to the highest base to look for value, and this is where we still see value there. Indonesia is another one that's interesting also. Indonesia have tightened a lot. This is also on the macro side. Those are very positive story, but you can also argue that a lot of the good news are factored in. The sovereign net index was trading below 100. This is still -- at the end, it's a BBB flat country. And -- but that's a valuation because of investor interest in the macro story for that. So we are more selective in Indonesia. We see some value in the long end of the curve, probably. But probably we also have to get ourselves dirty to get involved in some of this credit. We have some ESG issue surrounding that. So that's obviously...

Thank you. Jenny, if I look at supply, it's very tight. Even compared with last couple of years, the issuances have been -- have grown -- have recovered a little bit, but they're still down year-on-year. And at the same time, we have redemption. We have also defaults. So on a net basis, the stock has declined for the usual G3 currency bond. So is this one of the drivers for performance in the bond market?

Near term, technically, yes. But as a long-term investor, like we are longer-term investors, for us, it's more important to identify the longer-term shifts and trends that can have implications on the investment landscape for the years to come. Yes, supply is always a technical factor to a certain extent, right? And -- but also, supply is cyclical as well, right? If you -- and we all see that there's a high correlation between the interest differentials of the local currency. This is U.S. dollar. This is the supply. So that's going to change. This is just, what, a cyclical thing. But I do think what's more important going forward is we do see structural shifts that we haven't seen in the last past decade that are happening, which is very relevant to this region. I think the number one is, of course, is on the macro front for China. From a macro perspective, the step-up of central government support, both from a physical and the monetary side, will put a floor on growth while structural changes represent selling. But most importantly, fundamental to us, it's unlikely for China to go back to the old growth model, which relies excessively on borrowing and channeling access to savings to unproductive investments to boost GDP. That's not going to come back. Now the shift landscape from a policy perspective, it's not a change of that new growth model that China want -- China intention -- has the intention to go for. But it's a reality check on the time line and execution of the new growth model, right? So that will have implications that requires everybody, all participants in the economy, the government, the corporates, financial institution, investors to adjust our expectations to adapt to this new normal. That has implications on how we do things, right? For example, in the past, China is one way, beta. You close your eyes by the ship -- by the worst credit, right, then you're going to outperform. But now people need to go back to basics, focus on bottom left, on the vendor credit selection for alpha generation, particularly when market growth is still there. The second trend is diversification of currencies, currency holdings. Again, in the past, majority of Asian emerging economies, it's dollar-based system. We do think that in the next -- in the future, in the next 5, 10 years, that's going to change. It will become a dual system. The dollar system is the local currencies this time. So when you are saying, Chris, that the Asian sovereigns or Asian corporates are no longer issued dollars, why are they still issuing dollar? Because of their local currency, there are better liquidity. There are -- like for example, India, right? I mean they have an optionality now. They have other options now. They don't have to rely 100% on the dollar system. Again, this requires investors to change as well.

Yes. Indeed, I think if you look across all the regional markets in Asia, the development of the local bond market and the liquidity pool is pretty impressive. And we don't see the same type of volatility in the G3 currency -- G3 bond market like we did, say, 15, 20 years ago when U.S. interest rates go up the way they have in the last 2 years would have wreaked havoc in the G3 currency, right? So it just really show the maturity and the depth of the capital markets in Asia.

Yes.

Okay. So we are almost coming to the end. But before we get to the last segment, I'd like to ask [ Xiamen ] to bring up a poll question for our audience participate. First poll question, please, [ Xiamen ]. So the poll question is what are the top risks for the Asia bond market in 2024? You have 4 choices: geopolitics and conflicts; second, actions and disruptions; third, resurgence of inflation; and the last response is China's debt deterioration. So please take a few seconds to answer the question. We'll look at the results. So Soo Chong, we have just a couple of minutes to go. So any last thoughts from you about this year? Maybe perhaps also looking at the 4 questions, and we'll take a look at the results later, yes.

To your question, I think we do expect this year total return [indiscernible]. I mean last year, we do have total return at 7% exactly. This year, our projection based on our forecast on the rates, I think we are talking about close to 8% to 9% of total return from the [indiscernible] as whole. So that's still not stability where it is. But the other part also, my guess is the debt risk to worry about. I think one single risk that I'm more worried about is probably the rate side rather than really the fundamental is now diluted. I think you look at the fundamental pressure is really highly concentrated rather than widespread, yes. So -- and if you look at last year, performance per se, I think the single source of it is actually -- is rate side, not the spread side. At the low point -- in the third quarter of last year at the low point of the sale, the credit spread is negative 0.1%, which is almost flat. And for the other 3 quarters [indiscernible], the only one that caused the swing is just the interest rate hike. So that's still the same thing for this year. I mean that's -- geopolitics is something that, yes, I think we do monitor. That's going to create, I would say, more short-term volatility. That's great. it's something we have to be mindful of. But would that be a very long-term damage? I think that's -- the answer to that is no. As what we have seen with the -- I mean when -- every time there is new noises of sanctions or whatsoever, what investor is asking now is not so much about what is the impact on the credit. What they're asking us is how much the U.S. guy or the foreign investors have to sell. And just to tell you that they are looking for it because that's really widened up too much from here. So that is -- the investor base is very different. So that's really -- they can take a very different view. So those are things to think about.

Okay. So you have a constructive outlook for the year. Thank you. Jenny, before we go to you, let's take a look at the results, the poll results. [ Xiamen ]? Okay. So these are the responses. So the top risk according to our audience is geopolitics and conflicts, 47.9%. The other is China debt deterioration not far behind. So something to think about. Jenny, what are your thoughts? And then your final thoughts for the year?

We need to appreciate a little bit more the Asian region that -- we touched on this before, which is the credit cycle. We think that the majority of the sectors from a credit perspective are in the sweet spot of the credit cycle, i.e., the repair and also the recovery cycle. And we know that -- so that gives us a base to build portfolios, right? That should be the core holdings of your portfolio, i.e., you have this sweet spot of majority of the sectors in your core portfolios. And then the true upper part of the credit cycle expansion cycle, usually that means there are some deteriorations because of expansion, because of leveraging and also the down cycle. You should be aware, that's where default happened. But also, we know that in both sides, in both quarters, the expansion cycle and also in a down cycle, that's where [ ARPA ] is coming from. So you build -- from our perspective, we can easily build a core base of using 8 to 9 -- nowadays it's probably 20% after the rally. 7% to 8% of our core portfolio and with [ ARPA ] coming from either the expansion or particularly in the down cycle nowadays, and you can get to close to double-digit type of return. I think that's the type of return that we can achieve, which is very attractive if you look at where U.S. high yield is and where the other parts of the high yield is. Now -- so that's what we think. And mathematically -- again, mathematically, it should work. I mean I know that everybody says India or whatever. I mean the non-China part of the market is very tight. Yes, it is very tight. But that's -- again, Gregg just said, we -- S&P expect the U.S. high-yield default rates go to 4%-ish. That's probably historical average, right? And we're looking at 7% mathematically if that works out, and that's what will happen. And last, if we look at the U.S. high yield, I personally I think there could be a significant recovery because of what happened before. But if we look at Asia, well, Asia is at [ 7.5% ], but our default rate is actually lower than 4%. So mathematically, that should be a better trade, yes.

Okay. Thank you. Another constructive view for the year ahead. Thank you very much, Jenny. So last but not least, Gregg, your thoughts about -- your final thoughts about the year ahead and also looking at the results from the poll questions.

Happy to agree with the audience. I think geopolitics is a front and center risk. A lot can go wrong. I'm a natural worrier, I suppose, as a credit rating analyst for a rating agency. I do believe our base case -- I do believe that the conditions are ARPA 9 now. And I do believe the other thing that we haven't talked about too much is the massive investment that needs to happen that's going to create massive demand for debt but also support the economy. So the investment in new chip factories, the investment in AI and data centers and energy transition. This is a huge sort of tailwind for the economy as well. But yes, geopolitics. And relatedly, we have many, many, many important elections around the world, including in the country that I'm in, and I'm not going to predict the outcome. But it could get quite contentious, and that could also upset the apple cart. Well, let's hope for good year of the dragon. The 2 year -- the year of the dragon 2000 was fairly benign. [ White McKinney ] was not a big deal. And the one in between in 2012 was when my daughter was born. So let's hope for a prosperous 2024.

Indeed, thank you very much, Gregg. So we are coming -- we come to the end of the session. What a fantastic and insightful discussion. Thank you very much, Jenny, Soo Chong, Gregg, for sharing your thoughts and for coming with your views. Our session will end here, and I'll pass it on to the next moderator, Xavier Jean, who will take us through the panel on BBB and Fallen Angels. So the floor is yours, Xavier.

Thank you very much, Chris. Good morning, ladies and gentlemen. It's a great pleasure to be with you today. I will be leading the second discussion. So my name is Xavier Jean, Managing Director in S&P Global Ratings. I look at Southeast Asian corporate entities, and so I'll be the host for the next hour or so. We'll have a discussion on Asian BBBs. That's a segment on which we are observing, I have to say, a growing investor interest. And I thought I would start the discussion with an interesting stat that about 80% of the companies that we rate in Asia Pacific are nonfinancial entities. 80% of them are rated BBB and above. And that's actually sharply up. The number was about 60% about 2 years ago. So we've seen actually a migration of those to the investment-grade space, and that's a great topic to discuss. So I'm delighted to have 4 guests for the discussion on this topic. Let me introduce them quickly to you. Omar Slim, first, he's a co-head of Asian Fixed Income at PineBridge Instruments. Second is Vijay Jote, Head of APAC Credit Rating Advisory, Debt Capital Markets at BNP Paribas. Hi, Vijay. And then I have 2 of my S&P colleagues, Chang Li, Director, China Country Specialist in a Corporate team at S&P; and JunHong Park, Director as well in the Corporate Ratings team looking predominantly at Korea. So the way I'd like to maybe structure the discussion for the next hour is to break it down into at least 3 topics, maybe a fourth one if we have time. The first one is gather the views from our guests on credit conditions, where they see risk building, subsiding in sectors, geographies, potential for an angel and raising stuff behaviors, which is also a big topic of interest from investors. Second, some thoughts about the current investment conditions in the BBB space, spreads, valuations and so on. And then a topic on issuances, where they're going in the BBB space after 18 months, which were relatively subdued or, in fact, a bit more than 18 months. And then if we have time, maybe touching upon, let's say, newer things like transition financing, novel structures and things like that, that some of our guests are seeing in the market. So I think first, we'll start with a poll question just to set the scene and gather a bit of feedback from the audience. I think the poll question is going to come to your screen right away. What do you think are the highest-risk investment-grade credits in Asia Pacific in 2024? So here, we have 4 possibilities. Obviously, there will be mainly more, including company-specific aspects. But one, differentiated government support; two, capital spending and M&A; inflation and operating headwinds; and then generally slowing macro growth context. So I think we'll have about 25 seconds or so for you to answer. And then once we have the poll results, we'll just move ahead with the discussion. Okay. So once again, just select one, B,C or D, or more than one if you wish. And I think we should be getting the results very shortly. Okay. Very interesting. So global GDP growth and slowing APAC growth and inflationary operating headwinds are the 2 most sources of the risks that our attendance is seeing. Capital spending and M&A, not so much so. That's very interesting. I think it's going to be a discussion topic for Korean companies, in particular. So JunHong, we will probably take on that particular discussion. And then differentiated government support is coming third. Okay. Interesting results. So maybe I can start off first with my S&P colleagues on the topic of credit.

So JunHong, maybe I'll start with you. Any views on maybe some of the sectors that you cover, where you see better operating conditions looking into 2024, maybe comparing also with 2023 or sectors that you see are facing a bit more headwinds?

Okay. Thank you, Xavier. Good morning, everyone. Like for the overall credit outlook for '24, we have somewhat cautious view. Like the macroeconomic condition, this is still quite challenging. And the consumers' consumption sentiment is also still subdued and somewhat weak. And also, the interest rate remains elevated. So this could put some pressure on the company's operating activities and performances. But having said that, there are some sectors who could perform better or like a rebound and benefit from like a post-COVID recovery. So the first sector I would mention is related to AI boom like a technology company like in semiconductor sector or like other electronics-related one. They -- their performances are rebounding, and they could benefit from AI booming like a TSMC, SK hynix, Samsung Electronics or like NVIDIA, who has exposure to generative AI chips. They are expecting better performances over the next 1 or 2 years or longer than that. Also, the post-COVID recovery-related one is the transportation, airline company or like airport operator or like tourism-related companies, their performances are recovering and getting closer to the pre-COVID level. So those are some sectors we could expect better performances. But the headwind is still ongoing. The first risk I would mention is a China-related risk. Like the demand from China looks still quite weak and subdued. So some sectors and also some sector -- actually, this is combined with the oversupply situation. So I could say like the chemical sector or like steel industry. They are oversupplied, and they are kind of suffering from the weaker demand. So they could face tough conditions. And another headwind point I would mention is the slowdown in EV transition. So like EV, electric vehicle is -- demand is growing, but pace of growth is moderating in recent period. And this could have credit implications on the players who have a very aggressive expansion plan into this EV battery value chain. And the last point I would mention is property sector. Like property market in many countries in Asia, the condition is still very challenging. And this is also linked to the weaker consumption sentiment and also the elevated interest rate. So it would take longer time for the property market and sector coming back to the normal level, yes. That's it from me. Xavier, back to you.

Thanks, JunHong. Chang Li, the previous panel talked a lot about China and what's going on there and GDP growth slowing down and so on. Do you see some of these similarities as well for Chinese corporate? Or maybe some -- some of the larger companies are doing somewhat better than some of the smaller ones? What are some of the trends that you see there?

Yes. Thanks, Xavier. Generally speaking, we expect our rated issuers to be resilient in 2024. That is much because our rated issuers are generally a large company and the high rating company because 85% of our rated companies are investment group. So most of them will be resilient in 2024. But as you said, many sectors could be performing better in 2024 than 2023, and some of them face headwinds. In terms of sectors having better performance -- financial performance in 2024, the first one I would like to mention, the gaming sector. This is mainly because of the increased number of visitors to Macau and expanded hotel room capacity in the market. So we expect the gross gaming revenue will be stronger than pre-COVID, 2019. And also the EBITDA of our rated issuers will accelerate in 2024, will be about 90% of their 2019 levels. The other sector I would like to mention is high tech because our rated issuers will have a better growth in revenue and EBITDA in this year. This is mainly due to the rebound of global IT spending, and PCs, smartphones will also stabilize in 2024. But profit margin facing pressure, and risks are really from supply chain diversification and rising U.S.-China tensions. The last one I would like to mention is the chemical industry, the chemical sector. We expect this sector may slowly recover, although the recovery could be very modest because of the overcapacity problem in China. But we do expect some producers are improving their operational efficiency and cash management. And also, they will stay more disciplined on spending in this year. And we also see some companies in this sector moving to high-end value-added products, and they will be better positioned amidst the downturn industry environment. And so they are less affected by the overcapacity pressure. In terms of the sectors having more headwinds in this year, of course, the property sector, we expect the national sales will also decline further 5% this year. Although the government has launched several rounds of policy support, but the market sentiments are still very weak. So slowing sales and margin pressure will continue to weaken Chinese developers' financial performance in 2024. The other sector is auto-related sector, just as JunHong said. I think the problem is very similar in China. We have turned slightly more conservative on auto demand in China this year. We lowered our estimate of the domestic light vehicle sales growth to 0% to 2% in 2024, mainly because of the slowing economy and big consumer confidence on big-ticket item spending. Also, EV, as JunHong said, the EV market in China is very -- the competition of EV market is very intensifying. And also, this will continue to weigh on the car makers' profitability and cash flow for our Chinese issuers. So the revenue and EBITDA growth are expected to be lower in 2024 than in 2023. Okay. I'll stop here. Back to you.

Thanks, Chang. I want to ask about SOEs because that's also has been presubmitted questions quite a bit on SOEs and LGFV. And I think as you can see from the poll question, that doesn't seem to be that much of a worry from a credit risk standpoint -- differentiated government support. Omar, maybe I bring that question to you as an investor. How comfortable do you think about SOEs -- LGFVs/SOEs in Indonesia, elsewhere in the region, in Southeast Asia. Are you comfortable about them? How do you look at them? How do you differentiate them? And are you worried about maybe more selective government support ahead in 2024?

Thanks, Xavier. I would differentiate between SOEs in particular in China and other places. I think in China, in particular, what you need to understand is the kind of the policy direction. And there, I think for some of the large systemic ones, it's safe to say or it's fair to say what was implied by the question from the audience that the concern is subdued. Having said that, I think for China, in particular, the policy direction is really what matters more. So I think we spent a lot of time in terms of thinking what growth is going to be like. And of course, it's important to have definite view on that. But the policy direction in China, in particular, is very important. And that's really what moves the market and that's really what drives credit metrics to a large extent as well. So the policy direction in China is that it would continue to be highly selective. It's kind of very targeted, sometimes the policy support is very minimal or very tepid, very timid. And we've seen it in full display in the China Property segment, for instance, as Chang was alluding to earlier and as we've seen over the past 3 years. So the policy has been evolving, but the contours of that policy generally has -- is one can see it rather, I won't say clearly, but you can see it roughly. And the support is there whenever it comes to some of the very large systemic state-owned enterprises. So yes, I think the support is there and there is -- we have a certain level of comfort in terms of some of the large Chinese SEOs. I think where the level of comfort goes down is whenever there are some that are facing some difficulties and where the support comes with significant strings attached, which is kind of different from how it used to be 5, 6, 7, 8 years ago, and we saw that, for instance, for some of the AMCs. So I think it's important to kind of differentiate in terms of where the policy direction is going. In terms of the other countries, Indonesia, you mentioned Thai or Southeast Asia and so on. I think generally, there -- the environment is more benign and it tends to be more idiosyncratic. But generally, quite a few of those names are perceived to be quite sovereigns for good reason. But we, in PineBridge, what we do is we analyze each of the issuer on a stand-alone basis, and we take positions as such. And frankly, it has served us well.

Would you be concerned hypothetically support is expected, let's say, widely by the market for a particular state to intensity, and it doesn't come -- or it doesn't come on time or it doesn't come fully. Would you be -- in China, would you be concerned about contagion risk maybe to other sectors outside of the SOE space or investors kind of being a bit dissolved by that? Or you think that would still be very, very contained and in using credit?

That's a good question, and we've been thinking a lot about that. I mean, to -- and I would give you the perspective from a portfolio management perspective and a stake in perspective. So we became more cautious when it comes to some of the Chinese corporate risk about 4 years ago or so. What we've noticed is that there has been a change, what we call the paradigm shift in terms of the Chinese policy support. And the way that we thought about it is that this will manifest itself in terms of either lack of support for some segments. And that sadly, frankly, decimated the China property developer market, for instance, which we think the vast majority of which is not going to come back. We do think that there will be some survivors, but I think the vast majority of it is not going to come back. And where the Chinese policy support will be there but will be -- will come with strings attached as we saw, of course, and for instance, for some of the Chinese AMCs. Chinese AMC, for instance, are important systemic financial institutions that are playing a systemic role and some of them are directly owned by or directly or indirectly owned by the Submarine. But even there, we saw that the policy support came with strings attached. So to answer your question more directly, would we be concerned about contingent risk? Yes, we would be. But I think the Chinese policymakers are aware of systemic risk and controlling systemic risk. And while the threshold, I think the major change that happened over the past few years is that their threshold to play in or to allow certain defaults and so on has increased substantially. I think where they stop or draw the line is in terms of systemic risk and that we've seen that happen quite a few times, whether it's having a systemic risk or having a large societal impact. And that would be -- what continued to be the case. And the last point I would make very quickly, Xavier, is that, we've done our own research in terms of, for instance, shocking the financial system in China, assuming, for instance, very significant nonperforming loans for instance coming from the China property developers. Quite frankly, the stress case scenario that we did some of the default gut there. But we also stressed for mortgage, nonperforming loans as well as projects and essence so on and so forth. And what we come to the conclusion -- we came to the conclusion that the Chinese financial system can take very significant defaults and nonperforming loans. However, and that's an important, however, there's quite a bit of dispersion. So some of the very large financial institutions will be able to take it, but some of the other financial institutions will need some kind of support. Of course, that's a shock scenario that we've done just to kind of illustrate. But I think it highlights the importance of credit selection essentially.

Interesting. It's a shock on the GDP growth. I don't know if you can maybe elaborate a bit. Is it like assuming GDP growth falls sharply or it's a geopolitical shock or it's...

So the shock that we've done is essentially shocked the nonperforming loans coming from 3 areas. First one being loans given to the China property developers by the banks and the financial system as a whole, but mostly the banks. Two is essentially the mortgage. The mortgage book in Chinese banks, and Chang would probably know much more about this, is quite large. It's actually much bigger than the China property developer loans, and also certain project financing and so on and so forth. So we shocked that where since we sell 50% or so for nonperforming loans for China property, the mortgage nonperforming loans right now for Chinese homebuyers still quite low, by the way. So the crisis is mostly in the China property developers. But in terms of people essentially buying homes and taking a mortgage loan and repaying, that's still quite okay. People are still repaying their mortgage loans. And there's -- in the Chinese financial system, that's something that's quite tight. So what we shopped is this. Of course, to your question, Xavier, what we also assume is that if that happens, that's going to be a big shock to the GDP as well. But the point of that exercise was to see if the financial system in China can take it. And the answer is yes. But -- and the but is that some -- particularly some of the smaller financial firms will face some difficulties.

Yes, Xavier. Maybe I want to supplement one context that we actually very agree on the point from Omar about the China governance, they have a priority to revamp systemic risk. So we do see some rating pressure on some SOE and even LGFV, but it's mainly due to some individual specific consideration, but not because of a wide spread risks, and we don't see a well spread upgrade of SOE, especially attracting this year. In terms of the government support in terms of the China SOE -- and I think generally, they will perform stable and this is mainly because they have very good founding position, especially amidst the domestic accommodative monetary policy. So they have best of refinancing risk as PoE has. But the problem is that the China SOE leverage, that keeps very high, especially become higher during COVID period as they need to do more spending to help stabilize the economy. So in terms of the fundamentals of SOE, we expect the Chinese SOE leverage will only gradually improve because of the slowing economic growth in the next few years. In terms of the government support, we still hold our view that the government support will be selective to the SOE, which have the strategic importance growing the economy and also to the LGFVs company bond. We think the government is still prioritized to help the LGFV and SOE to repay their public bonds. But in terms of other kinds of stats in terms of the banking credits and other standard financing products, we have seen some restructuring and defaults in recent years. So we think this indicates underlying trends of some of the weak SOE. Yes. That's what I want to say about the China governance.

Thank you, Chang. Maybe one very last question on SOEs and then we can move up because there's a lot of other things happening outside of China, of course, very interesting things in the BBB and aerospace. On China SOEs and maybe SOEs more broadly, what would be, let's say, 1 or 2 things that you're really closely monitoring in terms of government actions that effectively could make you change your mind that support will not be coming. So is there anything that you are really in other words, watching very closely to judge about support forthcoming?

So is for Chinese SOE or...

Yes. I think for you and [ another one for Omar if ] wants to add any watch points that would be good.

Yes. For China SOE, one thing we keep monitoring as the leverage. As I said, the SOE leverage actually increased during the past several years -- after the leverage campaign since 2015. But since 2019, you can see the SOE leverage become higher. So we -- this is one of the most important watching points by the government. So I think this is also which points by S&P, and we think this is the driven factor to what the government will do to the SOE, the policy support and the policy -- everything maybe because if you see recent policy measures about the LGFV, you can see the government actually have attending the LGFVs bond issuance, including offshore bond issuance. So I think that's one watching part by past.

Maybe just a quick point to add, Xavier. It really boils down to the policy direction, of course, leverage and the fundamentals and so on are critical. But really the policy direction you asked in your introductory question actually about local government financing vehicles that you have these. So for instance, in China, that model is at the very least challenge because on average, there's a lot of nuances between the different local governments and so on. But on average, more than 1/3 of their revenues come from land sales. And because of the China property crisis, obviously, that model is challenged. One can say it's broken. And again, there's a lot of nuances in between those local governments. If you look at Thailand, it's a different story from some of the Tier 2 or 3 cities, for instance. But that, for instance, is an area that we're monitoring quite clearly. We're not entirely sure how they're going to solve it. They have the means to kind of kick the can down the road. But it is an area which we are monitoring very closely and quite frankly an area that we're quite cautious on. So policy direction is what matters the most. I understand that it's difficult sometimes to get a good grasp in terms of where it is. But through the announcement and through their action, you can kind of tell which way it's going. Nutshell, we think it's continued to be very selective, very targeted. I don't think that the Chinese will not allow this company to go down and so on. If you've been doing that for the past 4 years, particularly in the China property market, it would have been a great strategy.

Thanks very much, guys. Before we move to the next topic, which is the Investment and Valuations, I want to propose to JunHong a quick presubmitted questions on Korean conglomerates, some of which are rated in the BBB category. Do you have any views on that? And I also noticed there are some potential for an angel risk there as well. So I think it would be good to -- just to give some thoughts about what's going on at these large Korean conglomerates, JunHong.

Thank you, Xavier. I think we can look at other slides. Can you move -- yes, this slide -- so this one is basically talking about the refinancing lease. But on the right-hand side chart, you can see which company is showing more like a negative discretionary cash or which country -- and you can see this -- the light green line, which is Korea. So for Korean corporates, the portion of companies incurring negative these years are much larger than other countries in Asia. While it did, like -- compared with other countries, Japan, China, it seems that Korean companies are moving more actively to diversify their business portfolio into other areas such as -- so they are actively preparing for the technological evolvement or the Korean transition. So many of these investments are related to the EV battery, EV value chain, including EV battery, EV battery material or the EV manufacturing itself. So this is why the Korean companies has a weaker free cash flow and also CapEx. From our former question, it seems that people -- some are less concerned about this capital spending and M&A. But this could be somewhat more like a Korea specific issue, but Korean companies are moving very actively. So now let me talk about credit implication. We can move to the slide, which shows ratings at BBB category. So you can see BBB flat, BBB- or BB+ rated entities or the Korean entities. And many of them are SK Group companies. And SK Hynix, they are doing the memories sending out the business and SK Innovation, they are doing basically refining chemical, but they are switching their business portfolio into EV battery business. And SKE and SOE, they are very actively investing into renewable energy and trying -- they are trying to diversify their business portfolio. So these companies overall financial policy has been quite aggressive in the recent years. For example, SK Innovation. I think you can move to the previous slide -- one back, yes. So the EV related -- yes, this one. So the right-hand side chart shows the leverage trend of SK Innovation. You can see over the past 3 to 5 years, the company's leverage has gone up significantly, and this trend is still continuing because they have a very aggressive expansion plan into the North America in particular in the U.S. market. They have bigger project in the pipeline, not only [indiscernible] Samsung, they are very actively investing into North American market. So the key to credit worthiness is how flexible they can manage their financial metrics. So a large portion of this investment, they need to rely on external funding. And so how much of debt funding they're going to rely for this expansion that could drive worseness of these companies. So some brand companies could face more demand or risk going definitely from here.

Interesting, CapEx being very important for a few specific companies on M&A in Japan, as we have also seen since the beginning of the year. Maybe we go to the second part of the discussion, which I wanted to raise, which is about investment strategies and valuations in the BBB, Omar, a few questions for you, including some that come from the audience that were pre-submitted. First, what's your thought about the spreads that we are seeing for investment grade today? Where do you think they are going?

Yes. We get that question a lot, actually. So spreads are tight. Wherever you look, whether you're looking at Asia IG, SIG, [ Europe IG ], essentially, they are tight from a historical perspective. I think they will remain relatively tight. I think you can probably see a bit of an uptick in terms of spreads with new issuance, with an economic slowdown and so on. But I don't think it will be a major kind of widening of spreads and that goes for the BBB as well. What I can tell you, though, is that most of the conversations that we've been having would focus more on the overall yield, which is, from a historical perspective, much more interesting. For instance, you can look at Asia IG, you're talking kind of mid- to high 5% in terms of average kind of yield. And that is interesting. And in terms of the spreads, it's interesting because folks would say that it's quite tight. And -- but the general attitude is that there's a lot of money outside migrating for spreads to widen before they engage with the market and by definition, if that's the case, then they never widened. And it has been kind of the dynamic over the past couple of years. And I think it will continue to be the case. And that goes for BBB as well Xavier, which as you alluded to in your comments earlier, is a big part of the universe right now.