Taiwan Loan House

A selection of numbers and charts that illustrate the events of 2018

Just what was it that made 2018 so terrifying for the Asian debt markets? Perhaps it was all about rising US interest rates and their impact on the global cost of money. Perhaps it was about a slowing Chinese economy, dragged down by Donald Trump’s petulant trade war and the fear of a collapsing debt mountain. Or was it the start of a great reckoning, following the irrational exuberance of the quest for yield over the past decade or so, as central banks turn off the spigot of quantitative easing? The year has been fractious, nervous, with a constant sense that the next storm can never be far away. But deals got done, even if primary issuance in the G3 currencies failed to add to the record-breaking pattern of the past eight years or so. “Asian credit markets have behaved rationally against a backdrop of strong US growth and a higher end-point for US rates. In many ways it’s a case of ‘nothing to see here, move along’,” said Mark Leahy, head of fixed income at the Singapore Exchange. “Primary market volumes will be the second highest on record albeit about 20% lower than 2017’s boom year.” The secular growth of Asia’s G3 primary bond market over the past decade has been breathtaking in terms of volume and number of deals, and perhaps 2018, for all the background bearish noise, has not been an unmitigated disaster. In 2010, according to Refinitiv data, a total of US$84.6bn printed from Asia (ex Australia) via 211 new issues. By 2015 the tally had more than doubled to US$179bn. The gangbusters year was 2017, when a colossal US$333bn printed via 564 deals – an all-time high. We are off that at US$249m from 487 deals so far this year, and, barring miracles, won’t be beating that record-breaking clip when 2018 comes to a close. But that achievement doesn’t look too shabby in a year when Treasuries commenced what many leading luminaries – including guru Bill Gross of Janus Henderson Investors – envisage to be a long-term bear market, bringing to an end the US government bond bull run that kicked off in the early 1980s. There was even a ray of sunshine in the rebound of Japanese yen issuance, and the continuing popularity of Green finance as environmental, social and governance issues moved up institutional investors’ wish lists. “The Asian bond market has made significant strides in recent years in assuming structural importance in the region, becoming a core avenue of funding for issuers as well as a key part of the investment strategy for insurance companies, funds, banks and private banks,” said Carla Goudge, head of debt syndicate at HSBC in Hong Kong. “We have seen market participants adjust to higher US Treasury yields, and expect markets to remain open next year.” RATES AND REALITY Digging further into the data shines a light on the impact of rising US rates on both issuers and investors. Emerging market Asian corporate issuance was down 28% in 2018 to US$221bn, while EM Asian sovereign issuance was down by 33% to US$14bn. This decline reflects both the unwillingness of issuers to lock in long-term funding at higher rates and of investors to step up – in anticipation of wider spreads and higher absolute yields to come as the Federal Reserve rate-tightening cycle continues apace. The lower reaches of the credit curve have borne the brunt of the forward-looking rate attrition, even though a flattening US Treasury yield curve has brought some relative value at the shorter end. “Lower-quality issuers are more sensitive to higher interest rates,” said Nachu Chockalingam, senior emerging market debt portfolio manager at Hermes Investment Management in London. “This is driven by the smaller headroom to absorb higher funding costs within free cash flows. Additionally, a bigger reliance on the front end of the curve leads to higher sensitivity to the flattening of the US dollar interest rate c

The period since the global financial crisis has coincided with a time of heavy investment by Japanese financial institutions. Emerging from their own 1990s banking crisis and the economic torpor of the post-bubble era, Japan’s restructured and rejuvenated banks looked overseas for growth from an enviable position of strength. Mitsubishi UFJ Financial Group’s purchase of a 24.4% stake in Morgan Stanley and Nomura buying Lehman Brothers’ European and Asian businesses were the most high-profile examples of Japanese banks moving out into the world. Other banks acquired huge portfolios of assets from international players forced into panicked post-crisis deleveraging, in the process further globalising their footprint. Mizuho’s purchase of RBS’s North American loan portfolio, for example, added bankers in key areas such as debt origination and leveraged finance. In corporate and investment banking, the three mega-commercial banks have led with their large balance sheets and have long been leading cross-border syndicated lenders. Refinitiv’s investment banking fee data (covering M&A advisory, DCM, ECM and syndicated lending) had the three megabanks plus Nomura in the top 25 global fee earners at the nine-month 2018 stage. Notably, Mizuho, MUFG and Sumitomo Mitsui Financial Group heavily outperformed the market: while the global fee pool fell 4.8% year on year, Mizuho increased its take by 12.8%, MUFG by 12.4% and Sumitomo by 9.1%. It is fair to say, though, that while the Japanese houses are slowly building better non-Japan DCM profiles (particularly Mizuho and MUFG), they are not yet competing at the top table and their international equity and advisory businesses lack scale. THORNY TASK Japanese banks need international profiles now more than ever given conditions at home, where Bank of Japan stimulus has killed net interest margins and an ageing population has curtailed future business opportunities. But the thorny task confronting management now is not just to lessen reliance on lending, it’s weaving everything into a coherent – and more profitable – global whole with a convincing strategic back-story. They must do so amid parallel initiatives to cut costs, reduce headcount, and close branches at home – all of that against the backdrop of potentially tricky global market conditions and challenging industry trends. “As long as they play to their competitive niches and core strengths, they’ll do OK. But this is not the most fortuitous time to be adopting a generalist approach,” said Benjamin Quinlan, CEO of consulting firm Quinlan & Associates. “This is especially the case in the current regulatory climate, where legislation such as MiFID II is forcing banks and brokers to become disciplined about where they play and the content they produce while ratcheting up their cost base. I do think the Japanese banks will run into headwinds.” Nomura has had its fair share of pain since acquiring the Lehman businesses, yet Steve Ashley, global head of its wholesale division, is cautiously upbeat. “Market conditions remain very challenging, but the changes we’ve made to our wholesale business since April 2016 have left us with a solid core operating business with a proven track record. Our flow macro business, despite a challenging last few quarters in some regions, continues to be a large contributor to overall profitability for wholesale,” Ashley said. In terms of priorities, Nomura will continue to focus on reinforcing its agency execution business Instinet by positioning it as a multi-asset platform. Business diversification is high on the agenda: one area earmarked for growth is the Americas advisory franchise. Nomura launched a private-side business unit – client financing and solutions – in April, taking content from IB advisory, client coverage, and sales and structuring in global markets to create a suite o

China’s role in the global economy is under intense scrutiny, thanks in no small part to the US president’s Twitter account. But while Donald Trump continues to rail against unfair competition, intellectual property theft and currency manipulation, China’s financial markets are finally opening up. “The theme of the opening up of China’s economy to the rest of the world has been talked about for decades, but the pace of change in the last 12 months has been remarkable,” said Julien Kasparian, head of securities services for Hong Kong at BNP Paribas. “Whether you look on the equities side, where we had the inclusion of China A-shares in the MSCI index, or whether you look at fixed income, where China announced a number of changes to the market infrastructure following the launch of Bond Connect during the previous year, the pace of change has been quite staggering. And more importantly for foreign investors, access to China has never been so easy.” Recent changes go beyond improving access for foreign investors. In April, China’s securities regulator finally gave the green light for foreign investment banks to hold majority stakes in their securities joint ventures and lifted similar restrictions on shareholdings for fund management and life insurance companies. Regulators have finalised a stock trading link between Shanghai and London and revived plans for overseas-listed companies to issue depositary receipts in China. “The theme of the opening up of China’s economy to the rest of the world has been talked about for decades, but the pace of change in the last 12 months has been remarkable.” “If you’re talking about the opening up of China’s financial sector, the real shift arguably began with the launch of the Stock Connect trading link between Shanghai and Hong Kong several years ago,” said Alexious Lee, head of China capital access at CLSA. “But whereas for the past several years the focus has been on testing the robustness of different access channels, we are now entering a different phase, which is about foreign investors stepping up their participation.” The trillion-dollar question, of course, is whether tensions with the US will lead China to change course. Will regulators target US-based banks and asset managers in retaliation for trade tariffs? Or will the chilling effect on global growth force Chinese policymakers into a more protectionist stance to defend economic growth? Most market observers are confident that China will continue to open its capital markets – gradually – even if tensions with the US escalate further. “I think it’s partly due to the foreign reserves being under pressure so there is an incentive for the government to attract foreign investment,” said Caroline Yu, head of Greater China equities at BNP Paribas Asset Management. The trillion-dollar question is whether tensions with the US will lead China to change course. Will regulators target US-based banks and asset managers in retaliation for trade tariffs? Or will the chilling effect on global growth force a more protectionist stance? “But more importantly than that, China realises that increasing the participation of foreign institutional investors in its domestic capital markets is crucial to its long-term development. So I don’t expect them to shift position because of the trade tensions.” INDEX ENDORSEMENT There is plenty of US interest, too. The biggest endorsement of China’s reforms so far came from MSCI, which began adding A-shares to its benchmark emerging markets index this year. The New York-based index provider formally incorporated 226 large-cap mainland stocks with an initial weighting of 2.5% of market capitalisation in June before increasing their weighting to 5% in September. MSCI has since outlined plans to increase the weighting of A-shares in its index to 20% of their m

A carefully selected collection of the highlights of 2018, as illustrated by Harry Harrison