THE ENDGAME OF the Hong Kong pro-democracy protests is the subject of intense speculation in South-East Asia, where any threat to the established order provokes intense unease among the region’s incumbent leaders.
Comparisons have been drawn to the student protests that ended in the Tiananmen square massacre of 1989, one of the most shameful incidents ever propagated by China’s leaders. Would they dare to resort to such force in Hong Kong? We will find out soon enough.
From an investment perspective, the gripes of the Occupy movement that has paralysed Hong Kong’s central thoroughfares for almost a week certainly resonate, and not just as far as universal suffrage is concerned. Since the city emerged as a global manufacturing powerhouse thanks to cheap labour in the 1960s, a super-rich elite has emerged that owns almost everything in Hong Kong, from the soaring towers of the city’s skyline to the power generation and telecommunication systems. It’s all a big family business.
In recent years this elite has developed a rather cosy relationship with the Beijing authorities and it is this relationship which is as much of a central bête noir for the protesters as the issue of being able to nominate their own candidates for the stewardship of Hong Kong.
IF YOU BUY bonds issued by this elite across the state-owned and pure industrial complex from Hong Kong, will you ever care? All you want are the coupons and the redemption payment at maturity. Indeed, if all this activism continues without the failure of Hong Kong as a state, the most likely outcome is that the hedging cost of CDS will widen and you will end up being able to buy Hong Kong debt at a much wider spread than you could have done at any time since 2008.
So the prevailing malaise presents rather a decent investment opportunity I should imagine, unless something dreadful happens and the tanks and guns emerge and we are forced to watch one of the most significant conflicts of the 21st century as far as global repercussions are concerned.
There will be no public relations spinning to be done if Beijing’s heavy hand leaves a couple of teenagers dead on the streets. It used to be the news agencies which set the agenda of the public mindset through the medium of photography. Now it might well be selfies of the most macabre sort on Facebook and Instagram that sculpt the opinions of the global forum.
But do the global financial markets really care? I somehow doubt it.
The reality is that global financial markets, or specifically debt capital markets no longer give a hoot about geopolitical scenarios, or so it seems. If anything, the markets rally on what used to be the most bearish of inputs. Riots, bloodshed, territorial annexation? We’ve seen it all, love, just gimme the coupon and the running yield and book me a first-class return to Davos!
Well, it might not quite be as simple as that, but there’s no doubt that the apparent insensitivity of global debt markets to events that used to be earth-shattering in their impact on secondary bond prices is underpinned by some unusual technical conditions.
My gut feeling tells me this volatility might not last long.
HAVING LAST WEEK attended a bond market conference organised by IFR in Singapore, I was sobered by the market conditions described by some keynote speakers that are obviously allowing a peculiar set of bond market prices to prevail on an unprecedented scale. The Dodd-Frank act and its front-of-stage Volcker Rule preventing banks taking prop trades on their books has apparently crimped, if not exactly ruined, secondary bond market liquidity. Thanks Mr V.
The result is that even if a bond appears overpriced in secondary it doesn’t matter one whit because there is no viable trading to support the opinion. Secondary liquidity has collapsed. And this has spawned the oddity that to all intents and purposes, the Asian G3 offshore public debt market is now all about primary rather than secondary.
You want a solid position? Write me a US$100m ticket in primary and I’ll scale you back to US$5m for the fill. You want a bid in secondary? I’ll buy US$500k from you. That is how it works now, and the open positions held on their books by investment banks have collapsed thanks to the zealousness of US regulatory reform.
Implied term funding rates must surely have risen as a result of this legislation and we will only know the real economic impact as it all pans out over decades.
Nevertheless let’s go back to the Hong Kong situation. It would be appropriate to see the relative value spreads of bonds issued by Hong Kong entities owned by the city-state’s tycoons exhibit some unusual volatility. Bonds that are known to have found a home in the cross-holding structure favoured by Hong Kong’s rich elite might well get drubbed as talk of a shifting playing field for the city’s super-rich emerges.
My gut feeling tells me this volatility might not last long. But it might well be a spread player’s paradise for the next little while. As to the big picture? Watch the story unfold on your iPad and go figure.
