Despite low levels of liquidity, not to mention the general liquidity crunch, more than three-quarters of the hedge funds surveyed said they are investing in China and India's credit markets and that they expect a steady maturation of the credit market throughout the region. Growth prospects for infrastructure, utilities, and commodities companies are also fuelling trading in credit products in the Philippines, Thailand and Indonesia.
"What's novel is that, despite the region's heavy reliance on developing economies, a growing amount of capital is focused on credit markets in Asia," says Bradley Ziff, director of the hedge funds advisory practice at Oliver Wyman. "Hedge funds and dealers recognise that, in the coming years, credit products in emerging Asia will present some of the most profitable opportunities for trading and managing risk."
The study, which comprises the feedback of about 60 Asia-focused hedge funds and was conducted on behalf of a bulge-bracket investment bank, reveals that 77% of the respondents actively trade credit default swaps and 35% trade local indices. The fund managers said that a lack of liquidity constrains business in single-name credit default swaps, but they predict that credit spreads in Asia will continue to widen, creating an increase in trading volume as volatility rises and spurring opportunities for investment in Asian structured credit.
Indeed, the basic building blocks are, for the most part, already in place. "Asia now has a fairly good and liquid investment-grade and high-yield corporate bond market to trade single-name CDS," says Ziff. "They have a limited capability to trade options, they can trade first-to-default, they can trade some tranches, they now have an Asian iTraxx and a well-developed capability of playing to the private placement market."
The effect of the subprime-related credit crunch in the summer may have delayed the pace at which Asia's structured credit market will develop, but has certainly not changed the general direction of development. Oliver Wyman initially carried out the study during the summer, before the worst of the turmoil, so had to return to the market to check that its findings were still representative.
"What we found is that the results are consistent," says Ziff. "China is still the lead geographic entity, people still see Indonesia as a good opportunity, and in the liquid product market, volumes have grown multi-fold, so I have no reservations about the findings from the work we've done."