Hong Kong: Asia is increasingly looking homewards for its funding needs and this is creating new business opportunities in credit, commodities and local currency risk segments, an official at Merrill Lynch said on 3 May.
Mitch Matharu, head of the newly created Pacific Rim credit and illiquid risk solutions group, said the company had hired six new people to form a 12-man team to tap this potential.
“We will see over time this region shift towards an increase in local currency financing in lieu of G7 borrowing, and we are developing a structured-product suite to address this change,” he said, referring to Asia’s traditional dependance on debt from global investors taken in currencies of G7 countries.
The G7 includes Britain, Canada, France, Germany, Italy, Japan and the US.
China, India and Indonesia are seen as the markets with the biggest potential, but the group would also target new emerging markets such as Mongolia, Vietnam and Cambodia, he said.
Bankers expect Asian offshore bond offerings to decline further in 2007 as companies tap into local bonds. It would mark the second straight year of declines following an 11% fall last year to $41.64 billion (Rs1.7 lakh crore) in dollar-, euro- and yen-denominated bonds—the three dominant forms of global debt.
But the lack of depth in Asian debt markets means secondary-market transactions would be expensive and difficult, a risk that could well be converted into a business opportunity.
“The risks are driven by the illiquid credit space. The objective is to assume some of the risks on behalf of corporate clients and share some with institutional clients through structuring,” he said.
The group would focus on illiquid credit, local currencies and commodities, Matharu added.
For investing in less liquid securities, investors—mainly financial institutions and funds—would in turn be compensated by higher returns.
“The opportunity for investors is that they can earn interesting and attractive returns... more lucrative than liquid investments,” Matharu said.
Asia’s rapidly growing economies and improving fundamentals have made investors increasingly comfortable with the region’s credit risks, which, in turn, has slashed the “Asia risk” premium.
Spreads on the JP Morgan Asia Credit Index over US Treasuries, an important risk benchmark, struck an all-time low of 118 basis points this year. It is currently hovering around 130 basis points.
Merrill Lynch has plans to formulate a similar team in Japan and already has such groups in the US, EMEA (Europe and Middle East) and Latin America.