HSBC Global AM holding out for cheaper assets
01 February 2013
By Hui Ching-hoo
Investors have been increasing their exposure to emerging market (EM) debt in lieu of the deteriorating economic conditions in the US and Europe. HSBC Global Asset Management expects this trend to continue in light of improved transparency and an appreciation of currencies across EM debt markets.
HSBC Global Asset Management Managing Director, Head of EMD Portfolio Management Guillermo Osses tells Asia Asset Management: “We ended 2012 with very strong capital inflows, which encouraged asset managers to take on a high level of risk with both external debt and currency positioning. We think that inflows in the first quarter of this year are likely to slow down in a similar fashion to what they did in 2011.”
He continues: “We perceived there to be a fair amount of volatility and spreads in the first half of 2012. Therefore, we are managing our portfolios’ positions very cautiously, especially in regard to credit spreads, external debt, and local currencies. There’s a good chance we will be able to buy cheaper assets when the volatility materialises.”
In terms of supply, total new issuance of EM debt in 2012 increased more than 50% relative to the previous year. Debt is now coming online at a similar rate to what it was in the fourth quarter of 2012. Mr. Osses predicts that the total amount of new issuances for 2013 will be in line with last year’s tally of US$411 billion.
Mr. Osses declares the firm has been paying particular attention to investment grade corporate bonds from companies in Brazil, Colombia, Mexico, Peru, and Malaysia, and some quasi-sovereign debt in China. HSBC Global AM is also partial to credit with five-to-ten year duration as it anticipates US Treasury yield reversing upwards in the next two-to-three years. This would enable the firm to minimise possible capital losses stemming from widening rates. Mr. Osses adds that the firm will be underweight on high-yield debt.
According to Mr. Osses, the firm’s global EM portfolio expanded by 50% last year – a lot of it due to increased demand from institutional investors. However, insurance firms and financial institutions in Europe and Asia with long-term exposure to EM assets are taking on significant risk. The interbank liquidity has substantially decreased (this is banks in New York and London which is where market makers for these bonds are based). This is likely to increase the volatility going forward if fund managers had to liquidate positions.
Mr. Osses says that when it comes to corporate debt, it seems firms from EM countries value higher spreads with a lower level of leverage. Investors consider EM companies to be less transparent than their developed market counterparts.
In regard to currencies, Mr. Osses asserts that in the next year or two, he is likely to favour those from economies with significant trade ties to China, such as Korea and the Philippines. He believes these countries will benefit from cheaper Chinese commodities.
Mr. Osses adds that he expects a rebalancing of spreads and currencies going forward and predicts them to become a more prevalent part of asset managers’ portfolios as speculation and accumulated risks increase.
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