Is Barclays more focused on the sub-investment grade part of the curve or the high yield area?
It depends on the credit cycle. We try to make our research transactional, so we tend to switch our focus between high yield and high grade depending on our overall view of the credit risk dynamics within the region. There are times when we feel the credit cycle is improving or that liquidity dynamics are supportive of Asian credit markets and we look at spread compression and moving down the credit curve. Otherwise, during times of event shock we will be focusing on safe haven high grade credits.
So where are you focused now then?
At the moment we're looking for spread compression to continue. For the past few weeks we've started to move more forcefully down the credit curve, although not in all countries. In Korea, for example, our banking analyst has been building on our economic and rates strategy and has been looking at bank sub debt spreads to tighten relative to benchmark.
How many people in the team?
We are split between three centres: Singapore, Hong Kong and Tokyo. In total there are 13 researchers, split fairly evenly between rates and credit. Our approach in all three centres is to have rates and credit research working alongside one another to try and create integrated views on particular countries and markets and maximize information flow. The rates researchers use economic analysis to forecast interest rate sensitive markets, such as foreign exchange, both spot and forward, and government bond curves, both local and foreign currency. They'll create the macro-themes and forecasts of benchmark curves. From this base, the credit researchers will develop views on the entire spectrum of a country's credit curve.
We adopted this approach because we have a philosophical view that there is no such thing as differing asset classes within emerging markets. Emerging markets are the asset class. We feel that you cannot really have an accurate and comprehensive view on a particular sector if you haven't incorporated into your analysis underlying views about what's happening at the sovereign level, and the broad interest rate and liquidity dynamics in that particular market. The reverse logic also applies. Our ultimate goal is that for any given credit or economic event, we can provide a forecast of market consequences across forex, sovereign bond, and credit markets.
What have been your best market calls this year so far?
I suppose the two market calls we are most comfortable with involve Singapore and Korea. In both Korea and Singapore, we managed to be accurate in forecasting the overall economic, policy, and credit cycle dynamics over the course of 2001. This has led to some very accurate forecasts in terms of the Singapore dollar and Korean Won, the local currency sovereign bond market, and of the credit spread trends in each country.
You've also made some fairly robust calls. You've made some strong comments about the Philippines and the quality of its economic data.
That's been quite a surreal situation. We have been reading in the press a variety of comments attributed to us that we struggle to actually find in any of the research we've put out. The issue was that we were the first house in the market to analyze the new balance of payments data template provided by the IMF. We used Philippine Central Bank and IMF data to highlight a larger than anticipated bunching of foreign debt repayments in 2001. Whereas the market was looking for $1.2 billion of maturing foreign debt, the data we were looking at showed $6.3 billion. From this assumption we decided to highlight that while this data showed a large liquidity outflow this year, it was not sufficient on its own to justify a sovereign downgrade. We analyzed usable reserves versus short-term debt, and using optimistic assumptions we came out with a ratio of 129%, comfortably above the safety level of 100%. Our conclusion was that the high burden of maturing debt was a tractable problem that would not imperil the sovereign rating, but that if the Philippines wanted to err on the side of caution, a $2 billion increase in FX reserves in 2001 would be desirable. In Q1 2001, BSP increased its FX reserves by $2.2billion through foreign borrowing.
So why did the Philippine authorities get so upset about this?
There was something of a misinterpretation because of comments coming out in the media. Our views were interpreted as forecasting a balance of payments crisis. In subsequent months we adopted a tighter definition of usable foreign exchange reserves, and we revised our ratio from 129% to 117%. This was seen as quite controversial because we were accused of an analytic error in the calculation of a gold swap. The fact was that our analysis can only ever only use publicly available information which limited our ability to address the gold swap issue, while our treatment of this subject did not alter our ultimate conclusions. For instance, the IMF subsequently revised its number of usable reserves to short-term debt to 118%, within 1% of our number. Because the IMF used some non-public information in its calculations, we cannot bridge this 1% differential between our respective forecasts.
Our customers, however, know it was just a misinterpretation of our view.
Misinterpretation or not, writing research in Asia can be quite a dangerous business. Clients can get very upset.
This is one of the bugbears of any analyst in Asia and does require added sensitivities and unfortunately, it does require on many occasions a very circumspect approach to the distribution of research among the media. Adverse-headline risk can be all that it takes to sour a relationship for a long period of time. It is an impediment to writing accurate and non-consensual research.
Will it ever change or will it always be like that?
The dynamic of the Asian bid that everyone has been talking about for years, provides greater latitude for the region to have this antagonistic approach to negative comments. The Asian bid creates a sub-optimal pricing of credit risk within the region, which therefore in the minds of many, moderates the need for accurate analysis of risk and reward. If you take the view that Asia will continue with corporate and economic reforms, and that there is going to be a deeper integration of Asia into the world economy via more cross border M&A and more developed debt capital markets, and then I believe there will have to be a transition to a more open approach to analysis within the region - more akin to Europe and the US.
How does Japan fit into your overall approach to Asia?
We think Japan must be integrated with the rest of the region, and I'm integrating Japanese research along these lines. This reflects how Japanese economic policy, growth and deflation dynamics, and trends in its financial sector, all have a profound effect on the rest of the region. A good example of this is the degree to which Japanese financial institutions are going to be increasing their exposure to Asia's credit markets. It suggests to us a pan-Asian view needs to be taken.
How important is Japanese buying of Asian credits?
What's crucial is the fact that we have seen a contraction of Japanese exposure to the Asia-Pacific region for most of the past 10 years. Only now with the Bank of Japan adopting an increasingly aggressive quantitative easing stance, which should over time recycle Japan's current account surplus and increase the appetite for overseas assets, will this trend sustainably reverse. So over the next 12 months, we are actually going to see Japan increase its exposure to emerging Asia, reversing the long process of capital reflux.
