- What are some of the new, innovative trends in structured credit across Asia? What is driving these?
The drivers have until recently been about hiking yield and gearing up in the hitherto low volatility, low default rate environment. However, it would appear that the market has now reached a turning point, where new products will offer less aggressive structures and will almost all be principal protected. It would appear the market has caught a chill in the last quarter and the trend going forward will reflect this.- Which products are best for creating attractive returns in a tight spread environment?
I don’t know how long we will see tight spreads for, given the current market. The market expects a flight to quality which may be reflected in a ‘back to basics’ approach to investments if the jitters in the market become more serious. With spreads so tight it will only take a small thing to send the market back out again.A great analogy is that of a butterfly flapping its wings on one side of the World causing a hurricane on the other! Clearly the Structured Market offers us good ways to hike returns, but there is no such thing as a free lunch. At the moment the best products are potentially products that combine principal protection with an upside that is understood and plays into the credit/currency markets. The Sentiment appears to be long Asian currencies in general and long volatility in general over the coming months. It may not be wise to be holding some of the lower grade paper that people have chased to market from the lack of spreads over the past couple of years. It is clear that some of these Companies will never be able to raise capital at those levels again.
- Good products and bad products: how can investors tell the difference?
The recent sub prime stories in the news have again reinforced what an important topic this is. It is key that as an investor you have to understand what you are buying. Many of these products are highly geared and leveraged so rule #1 has to be know your exposure. Not always easy with the complexity in some of the prospectuses and circulars but you have to understand what the downside is. Principal protection can of course offer some peace of mind, but the devil is in the detail.- How can investors measure and track credit products?
In terms of tracking the market and trends much has improved from the iTraxx Credit Indices in Asia. Although criticized for not always being fully representative of the underlying market in terms of names and weightings, they provide a good benchmark. Cash Bond Indices of course have always had a part to play but investors welcome the addition of CDS and LoanCDS (LCDS) Indices to the equation. In the less liquid markets some vendors are exploring hypothetical or benchmark prices to help participants measure their investments.- Is it all going to end in tears when the credit cycle turns?
It’s the multi-billion dollar question but as many have said for the past year at least, the market can only go one way when spreads are so tight. There will be many people thinking ‘I’ve seen all this before’. Overall the cost of protection is still cheap today, maybe not as cheap as three months ago, but still much cheaper than the average of the past three years. It does not all have to end in tears if investors have understood the risks in the first place and covered them to some extent. The main issue is that if one or two desks blow up then the domino effect is a real risk. This is what has got derivatives their ‘financial WMD’ tagline and bad press, but its all about the responsibility of the people that use them. There still is a sense, mainly based on the US, that in the corporate space this recent change in the cycle is technically driven. Yes, it is a bloodbath, but if demand comes back in and people buy at the bottom, there's money to be made. Finally, it is surprising the (lack of) risk management setups in banks in Asia today. It is as if this is seen as a cost to cut rather than a safety net, and that has to change.- What can Asia learn from the US sub-prime volatility and reduction in liquidity?
Be sure you understand what you own and don’t take AAA today to mean AAA forever. All Markets dry up when there is volatility to some extent, and the tendency is for market makers to ‘Off All’ when things get a bit hairy. In Asia we can learn that even in larger, so called developed, markets there can still easily be times when you are caught in a liquidity trap. We have a smaller pool here in Asia, so the trap can close faster and with less to trigger it than in the US Market.Elliott Hann has 10 Years experience in the Fixed Income and Credit Market and has held senior roles at Reuters as Head of Fixed Income, Asia and Global Customer Propositions Manager, Credit. Elliott has also worked in Specialist Sales, Project Management and marketing positions within the financial industry. Elliott is 31 Years old and lives in Singapore.
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