What is Standard Chartered's broad strategy in fixed income research?
Within fixed income research we have two major disciplines. One of them is fixed income credit analysis and the other is fixed income strategy. They work very closely together. The idea is that once we arrive at an opinion on a certain credit we can incorporate relative value and actually end up with a strategy that can be executed by a customer - rather than just saying we like this company. Within that the idea is to create strategies for customers and work very closely with our debt capital markets team.
Do you think that is different to the approach that others take?
I would say where we are different is that our focus is very much local currency. By definition, a lot of the companies that go to the local currency markets are companies that are too small to access international markets. So our target investor audience will tend to have a local flavour.
So you are basically doing a similar type of thing to what Peregrine did in its heyday? Smaller cap companies in Thailand and Indonesia.
I would say that is a fair analogy. In terms of the underlying currency, it is a question of looking at the local markets. We're not trying to be a "me too" player, and emulate Goldman, Merrill or Salomon, for example. If you want to get some credit research on a company like Petronas in Malaysia, you can go to all the big bulge bracket firms and get plenty of research. If you want to get information on a small company which only issues locally or maybe has not issued any debt at all, this will be out of the realms of these bigger financial institutions, and therefore that will be our niche.
So how many countries do you now have coverage in?
Currently nine: Hong Kong, India, Indonesia, Malaysia, Pakistan, the Philippines, Singapore, South Korea and Thailand. In terms of current corporate credit coverage, that would be Malaysia, Singapore, Hong Kong and Thailand. We will be beefing up on India, and hiring a credit analyst on the ground there. Going forward, we will probably include the Philippines next.
Of the countries listed, where do you have the strongest franchise at the moment?
With regard to Fixed Income research, I would not say one stands out. They are very comparable presences.
How many people do you have?
The research team currently consists of five. And we are looking to add one in India and add to the overall team next year.
Are there people on the ground in places like Thailand?
No, we are covering the region from Singapore.
Any particular reason it is being done from Singapore, as opposed to Hong Kong?
Singapore is really the centre for global markets for Standard Chartered. The Asian fixed income business is managed out of here. So this is the natural hub. Therefore the research has stayed close to the centre of the business.
These local markets tend to be fairly illiquid. What happens if you have a good idea, but the liquidity doesn't allow its execution?
This is certainly a problem, and will always be one in emerging markets. What you can do is find where some of the bonds last traded. And over time you can build up a relative value picture and say intelligent things about the spreads versus government bonds and swaps.
Yes it's difficult. Here in Asia there is a buy and hold mentality, and what we are trying to do through an education process is stimulate more relative value awareness, and thus help to create a more vibrant secondary market.
Most firms I have spoken to are focused on dollar bonds. Is the local business that you are doing a more profitable area?
It is more a question of understanding where the business is going as opposed to profitability. Since the crisis in 1997, there has been a trend for borrowers to move away from short dated loans and US dollar funding to local currency bonds. So the growth potential is huge, and that is where we have been focusing our research. We're primary dealers in most of the markets I mentioned. We will see continued growth. The new Basel Accord for banks will also help this process when it becomes effective in 2005. A lot of companies will not have ratings from S&P and Moody's and will be looking to get ratings from domestic agencies. We are going to see more bond issuance done locally.
Typically the domestic investors are not that sophisticated. Is the credit research you are doing not a bit too sophisticated?
They do not need it right now, and perhaps we are ahead of our time. The investor community and the regulators are embracing change, and looking to get up the curve. The learning curves are quite steep, but there is willingness.
Previously, salespeople will sell a bond to a customer and the next month when they try to sell another bond, the initial response was sorry, I've got no money. Now, more often than not, they are saying, fine, I have not got any fresh cash, but how does this bond look against the old one. There is a bit more of a relative value, secondary market trading mentality developing. That is encouraging.
And if you look at the growth of CDOs [collateralized debt obligations], most people could not have told you what it was five years ago in Asia. Now, just about every week you hear about another bank setting up a CDO programme to leverage its balance sheet.
