Robert Morrice is the chairman and CEO of Barclays Capital in Asia. A highly regarded veteran of the international bond markets, he came to Asia a year ago having formerly been Barclays global head of credit products in London. Here he talks about his views on Asia.
You have been here now for almost exactly a year. In that period, what change have you seen in the region and debt markets? Are you optimistic about the potential?
I think overall things look positive. I am actually more optimistic about the economies around the region than I was one year ago. Sitting in Hong Kong can give the wrong impression of what's actually happening in the rest of the region, much of which is actually faring a lot better than
Hong Kong right now. The tremendous amount of liquidity in each of the individual economies is consistently looking for assets.
Korea is leading this process and interestingly, is moving into the second phase. Banks are selling assets now so as to lend more money. It will be interesting for everyone in the debt markets - since we have been spoiled by liquidity - to see what happens when these funds move into other assets. If you look at Thailand, there's been a domestic-led recovery and there are signs of a pick up in exports. Japan has its own issues but has a lot of liquidity and there is tremendous demand for overseas products there.
Clearly, as an investment bank you've got to be profitable within the region, but you've also got to be indispensable to other regions, in terms of selling their debt products into Asia Pacific. And that's very positive as well, with Asian investors looking at external assets. That's one of the reasons I have become a lot more positive about markets.
So you are bullish about issuance from the region?
Overall it seems pretty positive. We'll probably see a deal from Thailand and we'll certainly see some deals from Korea in the next few months. The Philippines is embarking on a non-deal road show, and may do a deal at some stage in the next few months. We count Australia as part of
the region and that has also been very positive. The risk on the issuance side is we don't get enough. There is some product coming on stream but investors may be looking for more variety. A worry you have - from a cross-border perspective - is will there be enough to keep investors interested? That's an area we're working on now and I expect we'll start to see a wider variety of borrowers coming to market.
And the competition around Asia is pulling back with fewer full scale debt players across the whole region, and I am starting to can see how we are going to generate revenues over the next three or four years.
How keen are your European borrower clients to access the so-called Asian bid? Are they going to start doing more Asian roadshows?
They are definitely starting to pay more attention to the Asian bid. European borrowers know they have to continue to diversify their sources of funding and Asian investors are interested in high quality well-know names. We want to start with smaller, targeted deals to build name recognition.
The opportunities haven't necessarily been as wide and deep as we would like but that will continue to change and the borrowers will have to issue a lot more in domestic currencies. There remains tremendous liquidity in the region with stronger investor interest starting to build for paper denominated in Hong Kong dollars, in Thai baht, and there will be more for Korean won denominated paper at some stage, while the yen market has been quieter.
We spend a lot of time talking to European borrowers about how these local currency bond markets are developing. No doubt, if the global capital markets open up again, borrowers will be spoiled, and will slow the pace down. If we continue to get more volatility, I believe we'll get more and more borrowers coming to this region.
How do you see the relationship between the domestic bond markets and international dollar markets? Do the domestic markets cannibalise the Asian dollar market?
Cannibalise is maybe not the right word. But it has a huge effect on the ability of a borrower to do a cross-border transaction at very tight optical levels. The onshore arbitrage bid was very strong and advantageous for Korean borrowers for quite a long time.
Are we likely to see more bank capital deals? Or has that trend already peaked?
I would imagine we'll see more bank capital deals. If we take the time period of two to three years, for instance, we'll see more consolidation in each of the countries' banking systems and this tends to generate the need for bank capital. We saw that in Singapore, somewhat less so far in Malaysia, but we expect to see more, and probably also in Korea. There will be demand for that product from borrowers and from investors, if they like the name. They are becoming more comfortable with the structures and the like the higher spreads.
The deals you do for sovereigns are good for profile, but they don't tend to be that lucrative. Are you planning to do more high yield issues, which obviously are more lucrative?
One of the reasons we do the sovereign deals is to ensure our profile in that country The banks and the corporates can see we support the sovereign and are a trusted and committed player with whom they can do business. These deals will always be important for us. We haven't gone that far down the curve yet. Rather than high yield, we have tended to move more to the bank sector and local currency issues. Domestic investors understand the local credits better and provide the best pricing.
What about the strength of euro last year or so? You are a big euro house. Are you seeing more interest from clients in issuing in euro?
If we get a sustained period with the euro at these levels, we might start to see more borrowing. Quite a few borrowers around the region have been worried about the weakness of the euro. And because most of them would want to swap back into their domestic currency or benchmark against the dollar, they are worried that if they issued at E90 to the dollar, for instance, the euro's strengthening would mean they would be under water on the currency. Against this sentiment, we would expect to see more issuance if we get a sustained period at around parity to the dollar.
We should also not forget that it will depend on whether investors in this region want to invest in euro. Institutional investors in Europe and US will be more comfortable knowing that Asian investors are underpinning some of these deals. So it will be driven from both sides.
Is the process still driven by central banks? The Chinese central bank has previously said it was going to up its weighting in euros.
The Chinese central bank indicated that they are thinking about upping their euro holdings, but whether this has happened is unclear. The number they indicated equated to a $40 billion portfolio shift from dollars to euros, and we haven't seen that kind of buying power.
The real engine of profitability for many investment banks is the derivatives and liability management business. Is that continuing to grow?
I think it's grown quite a lot actually. It's not just interest rate derivatives. It's foreign exchange as well. As Asian economies continue to grow, then we will see more foreign exchange activity. So interest rate derivatives, non-deliverable forwards, and fx derivatives have quite a lot of growth. The growth will also be helped as more multinationals move into and around the region. If you look at MNCs moving production into the region , this will create a lot more liability management flows.
Multinationals won't want to leave themselves open to the wild fluctuations of foreign exchange risk. They're also not going to forget that interest rates have been very high in some of these countries. So they want to manage their risks in these areas using derivatives.
Did Asian CFOs get so badly burned in the crisis, that now they are over-conservative, and overhedge positions?
For sure, some companies got badly burned by the crises but we have seen this lead to a more sophisticated attitude to risk management.