It seems that the changes you introduced two years ago to your fixed income business ù largely driven by regulatory issues in the US ù have not proven to disrupt business for Citi. Do you plan to introduce more changes or do you think you have the balance right now?
We have spent a lot of effort in communicating to our investors our revised business model where we switched from research analysts to credit-sector specialists. We are still very much a client-facing and client-driven business. While the initial transition was a bit rocky, the increased acceptance of our new model is very encouraging to us. We will continue to refine our coverage model to meet changing client needs but probably wonÆt make another overhaul in the near term.
Many analysts say they will increase their exposure to high-yield over the next 12 months, which indicates clients are still focused on sub-investment grade credit. Is that fair to say?
Definitely. We think high-yield will further increase its importance in the Asian-dollar bond market. Asian high-yield corporate issuance reached $5.8 billion in the first three quarters of this year, a 35% year-on-year increase. The sector accounted for a good 20% of total dollar-bond issuance so far, against 17% a year ago. And donÆt forget we had a very quiet high-yield primary market in the past three months. High-yield corporates have also unseated the sovereign sector as the second largest issuer group. We expect to see the high-yield corporate issuance to get close to 30% next year and it is reasonable to assume that the industry will allocate more of its resources in covering the sector.
What are the main themes you are talking to investors about now?
How to position yourself so you are ready for 2008. We expect the macro backdrop next year to be volatile and we potentially see significant weakness as the deteriorating housing market in the US may finally take its toll on the larger economy. However, corporate balance sheets are at an all-time strong and should weather the weaker economy much better than the last down cycle. As a result, picking the right credits will be key for next year. In general, we prefer credits that are more domestic or regionally driven and less prone to external volatilities.
In light of the credit crisis, do you think that ratings agencies are going to change the way they do business? Do you think investors want them to?
I think the rating agencies have done a reasonably good job in the corporate space. We havenÆt seen many ugly surprises in corporate ratings in recent years. The same cannot be said about some of the structured product ratings, such as asset-backed securities and collateralised debt obligations, which mostly originated and were rated in the US. The impact on the rating agenciesÆ business in the Asia-Pacific region appears quite contained. However, we expect Asian investorsÆ appetite on highly structured products, which are traditionally ratings-driven, will likely go through significant retrenchment in the next year or so.