Morgan Stanley's head of interest rate, credit and currency (IRCC) in Asia-Pacific, Ranodeb (Ronnie) Roy, explains how the fixed-income market is going strong despite a global recession.
Before we begin, fixed income encompasses different businesses at different firms. Can you quickly explain to our readers what falls under your group's remit.
I'm responsible for what we call the IRCC business in Asia Pacific, which is interest rates, currency and credit.
You joined Morgan Stanley in early 2008. Your group has performed well in the last 18 months. How well have you done, and why is that?
In 2008, we grew the businesses by almost double over where it was in 2007, which I think, compared to our competitors, means we did pretty well, simply because 2008 was a watershed year for a lot of people. In 2009, our run rate is almost double that of 2008. So in short from 2007 to 2009 we probably will produce three to four times growth. We have done well because we have traded well, we have captured market share from competitors, and have managed to attract the right talent to augment the extremely talented people we already had.
When you were building up the business in early 2008 that was before the financial crisis, so before being able to take advantage of anybody else's dislocations. So in what segments were you building the business then?
Pretty much across all the businesses -- interest rates, currency and credit -- and distribution, which was key. We wanted to build on our existing teams and develop a balanced trading and sales platform, so we added two heads of trading through internal transfers and went out externally to hire two heads of sales. Within this process, we had a special emphasis on sales because we think at the beginning of 2008 we didn't have adequate scale in the sales division in the region, so we had to build that up. And we're still doing that.
Your expectation is that the fixed income business will remain strong for the rest of the year and into 2010 and 2011. Why is that?
We are actually in a very, very sweet spot in the fixed income markets. After every crisis there comes a period when interest rates tend to be low, yield curves tend to be steep and currencies continue to be volatile and credit tends to rapidly come in. We are in that good place right now. So all of those three businesses [interest rates, currency and credit] are doing incredibly well.
Some of the businesses that Morgan Stanley was very good at in the past, such as structured credit and the structured rates businesses, have not yet taken back off. But once the market settles down I think those will take off as well. So we are trying to build a business that has a very good balance - a balance between the traditional flow businesses and the traditional structured businesses so that in either cycle we will be able to serve our clients and make money.
We think we will remain in a recovery mode for a little time longer, so we expect the structured notes businesses will take some time to come back. We've already seen the first signs of some structured rates products because people are comfortable that interest rates are going to be low on the front end and high on the back end - so I think people are going to come back to structured rates. Structured credit is still going to take some time because of the binge that went on from 2004 to 2007 and because people have lost money.
Having said that, the concepts of leverage and credit are not going to go away. People are going to come back. Standalone and unlevered credit, at least in the last six months, gave good returns so there was no reason to lever them. But there will come a time when leverage will come back. It won't be in the same shape or form as it was, but it will come back.
Let's talk about investors in Asia - are the Asian investors increasing or is it largely global investors and what are they interested in?
Morgan Stanley's Asian investors have increased. We've hired a senior head of sales in rates and credit, and a senior head of sales for FXEM [foreign exchange emerging markets], and most recently a head of sales for China. So our penetration towards existing customers as well as towards new customers has definitely increased.
In terms of new customers coming in globally, they are from hedge funds and real money accounts. Hedge funds are still continuing to come up. A lot of experienced traders on Wall Street have started hedge funds and as they grow we look to grow with them.
Given that Morgan Stanley is a global firm, we see a lot of flows out of US and European investors and US real money investors buying our Asian credit products in the London and New York time zones. And we have our traders based in New York trading the same products.
In Asia, we have also dramatically increased our penetration of banks.
Again, we're still in the preliminary stages of the recovery -- so they are focused on very plain vanilla products, for example Korean high-grade investments, Asian sovereigns and other investment grade paper. Indeed, many of the Korean high-grade investments that have come out have been oversubscribed multiple times and a lot of them from US investors.
Let's talk a bit more about Korea. How are you building that business?
Our Korean bank branch came fully on line about two years back so up until recently we've been building it out and now we think we've reached a steady state. Our success in Korea is in part market dependent -- most of our competitors have also done pretty well this year because again currencies have been volatile and interest rates have come in. We have traded these markets well, but also our client franchise and footprint has increased. We have a bank branch that allows us to sell what other banks in the past could do but we couldn't. We've also done a very good job of getting new issuances out of Korea. So all of that has contributed to increasing our revenue.
Are you seeing market opportunities outside of Korea?
Obviously given that we have grown so much, all of our markets have done really well. Australia is another example of a country that we have done really well in, both in credit markets and in interest rates and currencies. India and China we continue to focus on and build. As I mentioned, we hired a sales team for China to augment what we already had.
In China we have a bank branch in Zhuhai and we are hoping to expand our geographic reach in China in the near future. We have a lending license there and we use successfully it to lend to good quality credits in China and we also have a loan syndication desk. In fact we are amongst the top three for loan syndications in China amongst foreign banks which is a good record for a bank that has only been up and running in China for a few years.
In India, we just launched a primary dealership in the last couple of days. We launched a non-bank finance company in the last 12 months, which initially focused on credit and rates and now we're moving our rates platform to the primary dealership. So that's going to grow, obviously, from zero to a certain level. This primary dealership is very timely because we will be able to actively get involved in government auctions which we were not previously allowed to do. We are also now able to actively trade the markets through our primary dealership platform, so we can trade on both the long and short side for plain vanilla derivatives and government bonds. And more important is the fact that we can now provide client solutions that we couldn't before. If a client wants to borrow in rupees in India we can do that through our NBFC, and now we can offer hedging solutions through interest rate derivatives, which we were precluded from doing before.
We've also hired in Southeast Asia, using Singapore as a sales hub to talk to clients in Indonesia, Malaysia and the Philippines. So productwise, it is still plain vanilla, but geographically we have expanded.