Overall outlook for second half issuance in the Asian International bond market?
The supply and demand drivers behind the Asian capital markets remain bullish and I expect the full year to still exceed 2005 û with high-yield and emerging market risk constituting a much larger percentage. That said market issuance in the first half of the year has been disappointing. Given recent volatility itÆs fair to say that the first half is unlikely to meet market expectations.
What markets do you expect to lead Asian issuance in the second half of the year?
The leading sectors are likely to be natural resources, energy and utilities, alongside the more mainstream FIG issuance. In terms of country by country, I expect Indonesia, the Philippines, China and India to be the front-runners.
With the markets' volatility, has the high yield window closed for the time being?
Unlike previous sell-offs this move has remained relatively liquid with active trading. The sell-off we see now will bring value back to the markets and I expect the market to perform well from that base.
Banks that are involved in the high-yield space have deals in their respective pipelines ready to come to market, and are making decisions on whether to pull the trigger sooner or later. Previously, when we have had similar periods of market volatility, investors were asking the investment banks to hold off on any new issuance - saying the market does not need any more supply; that itÆs too volatile; and asking you to hold off on any new business. However, this time the opposite is occurring: investors are willing to accept more business, but at a higher price.
The reality is that thereÆs too much money coming to Asia with a high return mandate, and that money is going to have to be put to work. To some extent this pullback is welcome.
Some suggest that Fed Chairman Ben BernankeÆs lack of a consistent message is at fault for the recent market volatility, what is your opinion?
Recent volatility is a natural result of speculative overshoot, particularly in commodities, and a long predicted up-tick in inflation partly driven by that overshoot. It's a little early to give the Fed Chairman his first report card.
Bernanke is coming off a point where we have been watching Alan Greenspan for 18 years. Eventually we will all became familiar with his pattern and adapt to it. However, if Bernanke is leaving a little more flexibility in terms of interpretation of what he says, my personal view is that is a good thing. I believe that if central bankers are too predictable, the markets become too predictable, and this eventually leads to moral hazard - ie overleveraging and investors opting to take too much risk.
You can definitely say that there has been an increase in risk premium, or volatility premium in the markets, but perhaps all that has happened is that we are now seeing a normalisation of volatility.
Overall Bernanke has only just taken up the role. You canÆt judge him yet: imagine judging Alan Greenspan two months into his regime after the 1987 crash.
What has caused issuance to dry up in recent weeks?
Volatility has been a factor but the primary reason has been long conversion periods for the many high-yield mandates out there. Bankers are focusing increasingly on the more complex and bigger ticket transactions.
Bankers probably have more business in the pipeline than at any time this decade, but, unlike the investment grade issuance of previous years, each deal can take 3-9 months to bring to market.
If you were to ask some of the repeat investment grade issuers how many meetings they took from investment bankers pitching new bond deals over the past two months compared with the same two months a year ago, they would probably tell you that theyÆve seen a drop, probably a welcome one! Banks are still targeting valuable investment grade business, but because of the market dynamics there is a lot of focus on the more intensive and credit sensitive high-yield business.
Are spreads going to have to push out to address the weakening dollar?
The dollar, the credit cycle, inflation and global liquidity are all weighing on spreads now but I expect to see a period of stabilisation during the early part of the summer.
If the dollar continues to weaken, do you expect to see more euro-denominated issuance?
Inevitably the euro will continue to take market share from dollars as it has done in most markets. Dollar weakness puts a bit more wind in these full sails.
Asia is still very much a dollar-centric economy, and that is a pretty big ship to turn around. Euro issuance has grown from 5% to 10%, 10% to 15% and then 15% to 20%: it is picking up around 5% per year. However, if the dollar continues its downward trend, you may see an up-tick of around 10% by the end of this year - so youÆre talking maybe 30% of the market.
Overall have you seen any shift in the standard splits of investors buying into new deals?
Retail is moving further away from the investment grade space and has even started to reduce activity in the higher yielding deals. However, this has been more than adequately taken up by European banks and fund managers, who have joined EuropeÆs insurance companies and pension funds as accumulators of Asian credit risk from a deeply underweight position.
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