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If you’re sitting in the eurozone, Asia’s local currency bond markets might look distant – and small. But this haven of relative tranquility is enjoying robust growth amid the turmoil roiling eurozone markets.
In fact, as the Asian Development Bank reported late last year, emerging east Asia’s local currency bond markets have tripled as a proportion of the global market since the Asian financial crisis in 1997.
According to ADB figures, East Asia’s $3,658bn worth of local currency bonds outstanding accounted for 6.2 per cent of the global total in the first quarter of 2009, compared with 2.1 per cent in Q4 1996, on the eve of the 1997-98 Asian crisis. The total value of that market grew nearly seven-fold from 1996 to early 2009, reflecting regional efforts to strengthen local bond markets and lessen reliance on foreign currencies.
All very well, though one problem – and a key deterrent for large investors – has been relatively poor liquidity.
But, as the FT reports on Wednesday, there’s an interesting shift afoot, with trading volumes in recent weeks moving dramatically away from bonds denominated in G3 currencies – dollars, euros or yen – towards those in domestic currencies such as the Chinese renminbi and the Indian rupee.
Not only that, the rise of Asia’s local currency bond markets has generated a bonanza for regional domestic banks which, according to a new report from research house Greenwich Associates, outgunned their global rivals in the region’s local currency bond markets in 2009, capturing about half the market share of trading.
Part of the increase for Asian domestic banks is due to cutbacks at their far bigger, western rivals. Some global dealers such as Citigroup scaled back their capital markets coverage in certain Asian countries during the financial crisis – which allowed domestic banks to sweep in and capture newly freed-up business, according to Greenwich.
During last year’s surge, trading volumes in domestic currency Asian bonds totalled $941bn among the 748 investors surveyed by Greenwich. In China alone, domestic trading volumes jumped 423 per cent from 2008 to 2009, while volumes rose 242 per cent in India and by 111 per cent in South Korea.
About two-thirds of trading volumes comprised government securities.
And in a striking change from previous years, when global banks dominated the market, in 2009 domestic players took about 50 per cent of trading volumes – against a market share of about 30 per cent in 2008 and just 16 per cent in 2007, added Greenwich.
HSBC and Standard Chartered were the international banks with the strongest positions in domestic Asian credit, with market shares of 12.4 per cent and 11.1 per cent respectively, according to the Greenwich survey.
Deutsche Bank had a market share of 6.3 per cent, down from 15.3 per cent in 2007, while Citigroup’s share of 5.8 per cent was down from 14.7 per cent two years ago.
Among the domestic banks to make big gains in market share were Bank of China, Agricultural Bank of China, and India’s ICICI and Derivium Capital. Bank of China was ranked the third-biggest dealer in Asia, with a market share of 7 per cent in 2009, up from 2.1 per cent in 2007.
What you make of the rosy outlook for Asian currency bond markets also largely depends on whether you subscribe to the “gloom and doom” theories bedevilling sovereign debt. Speaking of which – and of bonds in general – leads us to this tidbit from Bill Miller, chairman and chief investment officer of Legg Mason Capital Management, who writes in Wednesday’s FT:
This affinity for bonds over stocks is understandable when looking at the past 10 years, but perverse, we believe, when looking at the likely course of the next 10. Bonds crushed stocks the past 10 years, with riskless Treasuries returning more than 6 per cent per year, while stocks lost money on average each year of the past 10. Ten years ago stocks were expensive; now they are not.
Related links:
Investors show “perverse affinity” for bonds – FT
Asian central banks signal a tightening trend – WSJ
