JPMorgan's head of fixed income research, Greg Batey will move to London with the firm at the end of the year, after a long and distinguished period in Asia where he helped to raise the standard of credit research in the the region.
The new head of Rates and Credit research will be Bernard Eschweiler, while David Fernandez will head up sovereign research, Sanjai Vohra will head up corporate credit research and Amy Li will run portfolio and index strategy.
Here Batey discusses trends in Asian fixed income research.
How have you integrated JPMorgan and Chase's approach to credit research?
With the merger, we were able to take the best resources of each of the firms and combine them. There were talented people at both heritage companies and we kept the best.
As a result of the merger we were also able to rethink how we do research. I used to work at Peregrine, and there we were able to put out a piece of comprehensive research that combined economics with the markets. With our merger, instead of just looking at the fixed income markets, we teamed up with Bernhard Eschweiler, who comes from the rates and fx/swaps business, as well as the economics and equity groups to put out something more comprehensive. The rationale for this, especially in Asia, is that if you look at any financial market in isolation, you run the risk of missing the bigger picture.
A good example of this occurred in Korea early last year. Daewoo Motor was being worked out at the time and there was concern about the health of the investment trust companies. Investors were looking on with some anxiety. This was happening despite the fact that Korea had led the Asia s economic rebound after the crisis and was running a very healthy balance of payments surplus fed by net inflows on both the current and capital accounts. All of a sudden, the Korean won weakened. In response fixed income spreads started to widen as people were asking what's going on here? Well, what had happened was that the Nasdaq had sold off. When it sold off, it affected the tech-heavy Korean stock market and that caused a tactical outflow of money, which affected the currency. So if you had a view of the equity market and the currency market you wouldn't have been surprised at all. If not you ran the risk of making a wrong investment decision, based on the wrong perception of what was going on. When the market figured it out, the currency and bond spreads recovered.
So that is what our fortnightly Asian Markets Outlook and Strategy, or AMOS, is all about. We've taken economics, loans, foreign exchange, convertibles credit and domestic fixed income markets and combined it into a regional overview. The investor feedback has been very positive.
There seems to be a general consensus that market technicals are a dominant factor in Asia. More so than credit.
That's true to a large extent. The Asia bid is a classic example of this. Local banks have a lot of liquidity and loan to deposit ratios are at historic lows. These banks are not lending as much money out but they have money to put to work. Banks are finding that the fixed income market provides the best opportunity to them. And because of their asset liability situation, they'll swap these fixed rate structures into floating with Libor spread targets. Whether you reach that Libor target is a function of the spread of that fixed income instrument, but also what the swap spread is, and the swap spread has been narrowing due to factors in the US, such as the Fed s aggressive cutting of rates. These technical factors have affected spreads of many high quality dollar bonds out here, more than the fundamentals. Another interesting aspect of Asia dollar bond market is the high degree of market segmentation. We have attempted to isolate and reveal these dynamics by viewing the Asia dollar bond market as comprised of sovereign and quasi-sovereign, investment grade, and non-investment grade. One of the tools we have developed to help understand this different behavior is our Asia dollar bond index called JACI. It is used by fund managers out here and a number of other investment banks. We don't restrict access to it.
Is there money benchmarked against it?
There have been mutual funds set up around it, and more and more of our investor customers are looking at it and using it. JACI is much more widely followed than any other index measuring Asia dollar bonds.When you talk about the battle of the indices, I think JACI has won it in Asia, because it is widely available and designed to be useful to our customers in thinking about strategy.
Do you run a model portfolio benchmarked against JACI?
No, but we use JACI to talk about relative value trades and the best sectors. The way we partition it for our customers is by country and sector, but also by investment grade and non-investment grade. It is interesting using this latter partitioning, as it clearly shows the existence of the Asia bid. JACI investment grade spreads have outperformed comparably rated US corporate bonds. That is clear evidence of the Asia bid.
We spoke before about the Asia bid as being one aspect that influences perform in Asia, in addition to what pure credit research would indicate. There are certain parts of the Asia dollar bond universe that attract global emerging market investors such as subordinated bank debt and the Philippines. As a result it is not unusual to see that as emerging markets spreads move, it may influence the Philippines. As risk aversion rises globally, you will see the Philippines and subordinated bank debt spreads move. These are relatively liquid parts of the Asia dollar bond universe, but it behaves very differently from other liquids sectors, such as Malaysia and Korea sovereigns, Hutch or MTRC. There are other sectors: high yield and distressed debt. GH Water is an example of that. That credit was well known to distressed debt investors when it came to the market in December. It was rated high yield, and as more investors learned about the issue, demand grew. It has been a star performer.
Different banks have a different emphasis. HSBC's research tends to be focused more on the high grade end of the curve. UBS Warburg's is more on the sub-investment grade. Where are your resources targeted?
We have different constituencies here. Our research helps the debt capital markets group. And that can tend to be sovereigns and investment grade, but also non-investment grade in the Philippines. We have a flow business, credit derivatives and a distressed debt desk. We also have a global emerging markets business. We plug into all those.
But there's no particular emphasis?
JPMorgan is a big investment bank and all of these product areas are active.
How many in the team in total?
So it is quite a big group. Most teams seem to be around five.
Yes it is a big group. But you see it is not just credit research. We also have an index, and we also do sovereign research and support the distressed debt desk and the flow business.
Do you do anything in the local currency bond markets?
We have a successful local market effort, but so far we have not been that active on the credit research side of it except in Singapore and Hong Kong.
On this subject of model portfolios, some of your counterparts maintain it is a good thing because it disciplines analysts to put themselves in the shoes of fund managers.
It is an interesting idea and it is a good discipline. If you run a model portfolio you are assuming there is a generic type of investor who really participates in that asset class. But in reality, there are many different types of investors out there. For example, the Asia bid is driven by banks that are looking to swap. So if you present them with a model portfolio based on JACI it not relevant to them.. That's the name of the game in research. Customers get a lot of information. You've got to be relevant.
For the Asia-based JACI investors, we give them our top picks and we usually split it up into investment grade, high yield and distressed.
You, Ivan Lee (Salomon), Abdul Hussain (CSFB) and Damien Wood (ING Barings) are all ex-Peregrine. Do you think there is scope today for a firm that just did Asian debt?
No. I think the answer why lies in what we just discussed. There are different types of investors interested in different parts of Asia. There are economies of scale associated with having a research effort looking at the broad range of Asia bonds. And so you have to find out what the competitive advantage something like Peregrine would have today. Peregrine was successful because of the phase of development of the fixed income business out here. It was a niche player in a special time.