Brad Levitt, Standard Chartered's head of Asian fixed income, outlines his hopes for the year ahead as well as looking back at recent trends.
What are your main hopes for the local currency bond markets in 2003?
We expect to see the ongoing development in all of the local markets, as regulatory authorities and central banks continue to push for change and increased liquidity.
What were the main trends in the Asian local currency bond markets last year?
One common feature was the continued improvement in the infrastructure of local bond markets. Although the markets evolve in different ways, governments and regulators continue to focus efforts on providing tools for them to work efficiently, and from this we are seeing futures, repos and derivatives markets develop in different parts of ex-Japan Asia.
Another characteristic of 2002 was an increase in structured products, particularly in India, Thailand and Taiwan where you are now seeing a variety of new structures such as inverse floaters. The diversity of and introduction of "new" products such as asset-backed securitization is one of the most exciting trends in the local markets.
The development of retail bonds is being commonly hailed as a big plus for the markets. What is your take on that?
In Hong Kong, the rise of the retail bond market has been a very significant recent development. Although a lot of planning went into this, it must be said that various factors aligned at the right moment, such as the continuing depressed property market and the slowdown in the equity markets combined with a very liquid banking system offering relatively low deposit rates. Retail investors wanted to look beyond equity and the low interest available from bank deposits and are starting to look more at portfolio diversification.
The retail market has been long-established in Europe and the United States, but it has been slow to take off in Asia. The timing was right in Hong Kong, plus investors liked the familiar names of the issuers, such as quasi-government borrowers Airport Authority and HKMC, and large local corporates such as Wharf.
I would not go as far as saying that it will be the saving grace for local currency markets across the region, but other countries are also looking at getting retail deals off the ground – there are just a few regulatory issues that need to be resolved.
What are the prospects like for the retail bond markets in 2003?
The Hong Kong retail bond market should continue to experience growth as it did in 2002. Potential also exists for Singapore, and to a lesser degree, Thailand and the Philippines.
Where do you think most activity will originate from in the coming months? What will drive new issuance in 2003?
We expect another strong year of issuance in Thailand and India and increased activity in Indonesia and Malaysia. Across many of the markets, ABS issuance should continue to grow as well as other structured products. Both M&A and refinancing would also be drivers of new issuance.
Which markets would you like to see most improvement in compared to last year?
Indonesia and Malaysia are markets with good potential for increased issuance this year as compared to 2002. We expect to see a strong year for both Thailand and India, as well as continued activity in Hong Kong.
Singapore seemed to be quieter than previous years in 2002: why was that?
The volume of issuance has been down in Singapore this year, although the secondary market continues to be one of the most liquid in ex-Japan Asia. Primary issuance is down because some of the most active issuers in recent years have not accessed the markets and done as many deals this year. The statutory boards have done fewer deals and it's the same with the property issuers. As far as the latter group is concerned, the fall in deals maybe because the market has become a little heavy on real estate transactions and that property firms have had more access to the bank markets.
Do you expect activity in Singapore to pick up this year?
That will depend on both the interest rate environment and the level of M&A activity. If interest rates remain at current low levels, coupled with low M&A activity, we would expect bond issuance to remain flat. However, more structured transactions, such as ABS, CDOs and structured notes, should fill in any issuance gaps.
There seems to be more focus on the Indian market recently. What are the reasons for that?
India has received more attention this year, but it has had a large market for some time. Much of the domestic issuance is done by private placement, and a lot of the deals are relatively small tranches. On the plus side, the market is active and innovative with new structures being introduced, and generally there is a huge talent pool. The one drawback is the lack of a fully developed derivatives market.
What about other markets?
Thailand was one of Standard Chartered's big success stories in 2002. We have seen a variety of issuance and I am optimistic about the future of the market. We have seen a move away from plain vanilla products into new types of deals, such as combined floating and fixed rate deals and inverse floaters. Good quality issuers have come to market, such as Exim who have been able to complete deals on more attractive terms than they could achieve on the international markets. The name and credit of the issuer has much more recognition onshore, and domestic liquidity has pushed notional rates very low and increased demand for high-grade paper.