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What it means to be top-ranked on the sellside
Monica Uttam 28 Sep 2017

 In a 12-month period that saw expert-defying events such as Brexit, Trump and a UK hung parliament, have people – as one UK government minister put it – ‘had enough of experts’? In a post post-truth world, are market analyses still useful?


That must be the lingering thought in the minds of investors. With the profound shifting of the political sands throwing up impossible combinations as perplexing as the US withdrawal from the Paris Climate Change Accord and the election of the non-party affiliated Emmanuel Macron as the leader of France, the unexpected is now the norm.


Yet after the initial shock, markets turn tepid – numb from the shock (and the lingering effects of QE) bringing the fear index – the CBOE Volatility Index – to a 23-year low and reflecting little of how the world of investing is facing unprecedented change.


Still, research, sales and trading by the sellside powered ahead. The local currency bond markets in Asia have held steady, supported by much stronger macroeconomic fundamentals 20 years since the Asian financial crisis.


This has provided room for a crop of analysts, salespeople and traders to showcase their mettle and shine in the latest leading industry rankings of who’s who in Asia’s local currency bond markets, compiled by Asset Benchmark Research.

 

Risky business
The 300-plus investors that responded to the Asian Local Currency Bond Benchmark Review nominated roughly 500 individuals who they think are best poised to navigate the murky waters of Asia’s bond markets. We asked these nominated research, sales and trading individuals about the biggest market risks they face.

 

INDONESIA’S ratings upgrade by Standard & Poor’s has been a major driver of rupiah bond performance this year. However, a Jakarta-based trader is still worried about US dollar volatility, foreign fund outflows and aggressive increases in US Fed rates. “With high ownership by foreigners, many of the moves are driven by offshore price action that is largely driven from the backdrop of what is happening globally,” he says.


All eyes are on the US rate hikes in the Philippine peso, Malaysian ringgit and Thai baht bond markets. A trader in Manila explains how this has been the main mover of the peso market in the past two years. “On a lighter note, the rise in yields has been tempered by the still soft bond liquidity in the market. Excess cash can be absorbed by the market easily.”


The peso bond market participants are also concerned about the impact of geopolitical risks in Asia, but more so locally where the possibility of martial law being implemented in the across the country “could offset gains on local assets”, says the trader.


In Kuala Lumpur, a strategist at a local bank is vocal on the impact of the Fed rate on ringgit bonds. “The pace of a more aggressive path to Fed rate hiking cycle may influence portfolio outflows. Prospects of Fed balance sheet reduction or tapering is another emerging theme or potential risk to watch out for,” he says. The moves by Bank Negara Malaysia to prevent the use of offshore ringgit forwards last year has already dulled investor sentiment and led global funds to withdraw more than US$8 billion from sovereign bonds from November through to February of this year, according to Bloomberg.


Fed balance sheet reduction and its influence on emerging market (EM) flows is the main concern for a Bangkok-based economist commenting on the Thai baht market as well. “Over the past decade, the correlation between the size of the Fed’s balance sheet and EM bond portfolio flows are nearly 98% as carry trades prompt investors to seek higher yields in EM.”


He suggests there will be a bear steepening bias on the Thai baht yield curve over the next 12 months in the context of higher US treasury yields. Thailand’s strong fundamentals has led offshore investors to park their money in these bonds much to the dismay of the Bank of Thailand. The Thai baht has appreciated roughly 5% against the US dollar year-to-date, hurting the export-oriented economy.


A sales head in Mumbai is more apprehensive about domestic drivers, particularly inflation affecting his market. “The central bank is directly targeting inflation and will not hesitate to give verbal direction or take actual measures, should it threaten to spike,” he says. Activity in the Indian rupee corporate bond market is also a concern as the rupee bonds available are mainly higher rated. “We need better supply, and consequently better and wider demand, for lower rated corporate bonds.”


Rising CPI will also impact Singapore as well as worries over China’s debt and its currency. “Inflation expectations are a key driver to asset performance,” a trader in the city state explains. “The majority of fund flows are driven by domestic flows from lifers and should inflation expectations pick up, we might see allocation away from credit.” China’s economy is a cause for concern as some issuers in the city state have significant operations in the country and the Singapore dollar bond market is viewed as a proxy for the Chinese market.

 To learn more about the Asset 12th Asian Bond Markets Summit, please click here.

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