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Stephanus Turangan, Mandiri Sekuritas (left):
The markets need a fuller range of financial
instruments, particularly repo and derivatives
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Participants
CL, Euromoney In the last two to three years, the Asian bond markets have broken all records in terms of issuance and tightness of spreads. But now we have a very different outlook for global bond markets, particularly with the change in the yield curve and the increases in US interest rates. So what are the key issues for the Asian market in this new environment?
TM, CIMB The two key issues have been the credit concerns sparked by developments in US autos and then inflation. I think appetite for Asian credits will continue but perhaps not at the levels we saw previously. Whenever we did a deal last year, we regularly got six, seven, 10 times book, and the trading accounts were very interested in every transaction. That may be gone. Nevertheless, I think the real money investors will still be around. And I think spreads have come to a level where people are comfortable again.
ST, Mandiri Sekuritas My perspective is the domestic markets, since Mandiri Sekuritas is mainly active in local currency fixed income. There, liquidity is still very strong and, though it may be true that the cyclical bull run is over, because of the strong liquidity in the market we may not be affected much by rising US rates until inflation starts to creep up. In Indonesia we have a problem in that as the oil price increases, Pertamina buys more US dollars and causes the rupiah to weaken, causing inflation. This is because oil export proceeds go directly to the government, while Pertamina has to import all of the country's domestic fuel requirements.
LHC, DBSAM The market really falls into two parts. The first is US dollar-denominated Asian bonds. There spreads have tightened a lot since the Asian crisis and are now close to pre-crisis levels. If you look at the sovereign deals from China, Thailand and Malaysia, they trade at 40 to 60 basis points above the US Treasury. Spreads are tight not just because of real money accounts but also because central banks are buying their own government paper. The exceptions are countries like the Philippines, where spreads are more closely correlated with what's happening in Latin America. And of course the ratings story is important: most of the Asian countries are likely to enjoy either no change in their current sovereign ratings or even a slight upgrade.
The second part of the markets is the local currency-denominated bond markets. In these markets global interest rate movements are less important than domestic economic conditions. Yes, rising US rates can have a large impact on markets such as Hong Kong, but in countries such as South Korea, you can see local interest rates have de-coupled from the US.
CL, Euromoney Ooi Lay, what would you add?
OLL, GIC Clearly, post-crisis the markets were primarily driven by local pension and insurance money, asset-swappers and the central banks. However, in recent years, there have been flows from cross-over investors from the US corporate world and, lately, we have seen the emergence of newly set-up hedge funds in major Asian financial centres. All these different buyers have helped to spark greater demand for Asian bonds. And, as long as the credit metrics stay positive, then I think spreads will remain supportive in the near term. Even in the recent sell-off, there was little capitulation because the technicals are good and, because of redemptions, there was money to be put to work. With the high oil price, Middle East money is looking for a home and many of them are known to be looking at Asia as an asset class.
Credit bubble coming?
CL, Euromoney Has excess liquidity distorted the pricing of assets?
LHC, DBSAM Well, in markets where there are fewer financial controls – such as Singapore, Hong Kong and Indonesia for example – that may be true. But in general it is the strong economic performance of the region that has attracted the flows that have caused currencies to appreciate against the dollar and led to the criticism of this so-called excess liquidity. Also, after the Asian crisis, most governments have put a lot of effort into developing their local currency bond markets and issued a lot of local paper. Before the crisis, the ratio between equity and fixed income was about 90/10. Right now in terms of market capitalization, the bond to equity ratio is about 50/50. Creating that local market liquidity has been a good thing and it also attracts foreign investors.
CL, Euromoney Thomas, you were on the road recently. Have investor attitudes become more cautious?
TM, CIMB Yes, somewhat. They are a lot more price sensitive.
CL, Euromoney So spreads will tighten?
ST, Mandiri Sekuritas Well yes, compared to six months ago, but against that you have a better credit story than six months ago. This is especially the case in Indonesia – with better political leadership, higher economic growth and a rational government budget. These should all translate into a better credit outlook for the sovereigns and major corporates.
CL, Euromoney So it sounds as though it is a tricky time to be thinking about getting into the market?
LHC, DBSAM Well, it depends on which part of the credit curve you're looking at. In the US and the US dollar then it's true that in the autos and consumer sectors spreads went out quite substantially at the triple-B part of the curve, while at the single-A/double-A part,spreads held. So there is a definite shift into safer sectors, and that will favour Asian sovereigns and to a lesser extent financials.
OLL, GIC Investors have got to work smarter now. The key to making money going forward is to not just throw the baby out with the bath water and retreat completely because the easy carry trade is over but to use your skill as a manager to be credit selective and trade both ways. On the intermediary side, the challenge is to create more tailored products to suit specific investor profiles
