If the bond market has its own rock stars, they are probably the folks who work at Pimco, or Pacific Investment Management Co. Llc.
Douglas Hodge, managing director for the Asia-Pacific region, demonstrated as much in Mumbai this week. His gig there whipped up a media frenzy; local reporters and cameramen crowded him everywhere he went. The buzz no doubt reflects Pimco’s status as the largest bond fund and investor in emerging-market debt.
The Newport Beach, California-based firm’s Pimco Total Return Fund boasts $125 billion of assets—and an E.F. Hutton vibe. When Pimco talks, people listen. And the fund’s manager, Bill Gross, may be the closest thing the bond market has to a household name.
Hodge’s message, delivered at a conference organized by the Asian Development Bank, or ADB, in India’s business capital, is an encouraging one for Asia’s debt issuers: “We’re ready and able to supply the demand for Asian markets—we’re just waiting for quality investments.” That, of course, is exactly the problem. To David Fernandez, head of emerging-markets research at JPMorgan Chase and Co. in Singapore, it’s a “field of dreams” dynamic: If Asia builds bigger, deeper, more transparent debt markets, many investors will come.
The trouble is, Asia isn’t quite there yet at a time when big companies such as Pimco are keen on investing there. Great strides have been made in the 10 years since the Asian crisis. Bond sales have grown steadily, secondary-market trading has increased, central banks are more transparent and regulatory environments are being streamlined.
The improvements are coming from a very low base, though, and India is a case in point. Its to-do list applies to much of emerging Asia: increasing investor diversity, adding to the availability of hedging tools, developing better secondary-market pricing, establishing investor-friendly tax policies and cooperating to promote more-liquid regional markets.
If Asia had done more during the good times of recent years to tackle those issues, companies such as Pimco might be pumping more money into the region. Now that credit markets are in disarray, it’s harder to attract more foreign investment to Asia.
“Heightened inflation risks, the slowdown in global growth and fears of external shocks are leading to increased volatility in Asia’s yield curves,” says Jong-Wha Lee, head of the ADB’s office of regional economic integration in Manila. “The risk is that this will continue.” More and more borrowers are delaying bond deals, relying on short-term financing from banks rather than longer-term debt issuance.
There are also signs that illiquidity in local-currency bond markets is limiting the development of Asia’s debt markets. The biggest risk is that Asia will act rashly, sending the wrong signals to investors. Thailand did that in late 2006 when it imposed capital controls. “The point is, don’t react in a somewhat harsh way that frightens everyone,” Fernandez says.
As well as dealing with turmoil in credit markets, governments need to be proactive as oil and food prices surge. That might mean the kinds of high-interest-rate cycles that unnerve investors. How policy makers act today will say much about how enthusiastically investors will invest in Asia.
For example, using government subsidies to shield consumers from rising prices may be costly and counterproductive. It would be very expensive, requiring governments to increase borrowings at a time when investors are demanding higher yields.
Pimco prefers debt issued by Asian nations that are allowing currency gains to stem inflation. In recent years, Asian central banks spent countless billions of dollars holding down exchange rates. That may be changing.
“We would prefer bond markets in Asia that use currency appreciation as a defense against inflation,” Hodge says.
“Malaysia has allowed its currency to appreciate a bit faster than the Chinese yuan, which largely defines the dollar exchange rate. That’s a bond market we would prefer. Singapore’s bond market is another one we like, as the currency has risen.”
Record oil costs and rising food prices have fanned inflation across Asian economies, forcing China, along with India, to curb lending byasking banks to hold more money in reserves to slow price increases.
Singapore, which uses its currency to guide monetary policy, unexpectedly set a stronger trading band for its dollar on 10 April, pushing it to a record high against the US currency.
Malaysia’s ringgit this week climbed to the highest since October 1997. Better bond markets are needed if Asia is to move forward.
They would help finance the building of better roads, bridges, airports and telecommunications systems. They would allow companies and entrepreneurs to finance expansion plans.
They also would help Asia attract greater interest from Pimco and its ilk.
“A lot of good things are happening here,” Hodge says. “But there’s more to do.”