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8 | ifr special report | April 2008 NON-CORE BOND MARKETS ROUNDTABLE

real prospects where people can follow the ideas. In the end, the investor must have a medium-term picture of those countries. If we look at the Nigerian naira, a number investors probably do not even have an idea where Nigeria is, so, I think, while there will be development, it will be for very specialised investors, whereas the general investor community, especially in Asia or the US, will probably focus on the more- developed currencies. I think the fancy currency going forward will be a mix, and that we will have diversified activity from the investor base. So, in future you will have Turkish lira, Brazilian Real, even ISK into weakness, as a mix in an emerging market portfolio, and people will probably concentrate on which names to pick, which part of the curve to pick, and behave more professionally in those markets than they used to do. For example, four years ago you bought Turkish lira because it was 20%: there was no special pick on the curve, there was no special pick on the credit, you just bought 20%. Today, you have a real idea on Turkey, you have quite diversified research on those countries, and now you create a mixed portfolio and create diversity. If you compare this to the core markets, this is really a segment where I believe we will see strong growth.

Paul Johnson: We are already seeing that in the former local currency funds, partic- ularly in Asia, particularly in Japan, where a lot of the economies that are too small to support ongoing stable markets are being diversified into local currency funds which give investors exactly that, diversification and a little piece of something small. If you look at places like Africa, it is very difficult to find the next South Africa: it is a long way off un- fortunately.

Holger Kron: And probably one key thing will be Plan B. When you enter

something, you want to have a Plan B: how to get out of it. If I look at Nigerian naira, I find it difficult. When things get rocky, how are you going to pull out? Look at ISK, which has developed in size and momentum quite a lot, but if you have people wishing to get out, they face severe problems if they are engaged in bigger amounts. Probably, going forward, we will have

this sentiment: “we need the Plan B”. So, the investor goes in with a Plan A and with an exit strategy, and here you need efficient swap markets and counterpar- ties in the swap markets domestically so you can really fulfill Plan B. In the end, this will be essential for those markets to develop.

Isabelle Laurent: The point about the market infrastructure is absolutely key.


think what we have seen is many governments saying “we want to ensure that we can develop a domestic capital market”, but actually what they have focused more or less exclusively on is a primary market for government bonds. That then requires different infrastruc- ture than actually creating a secondary market and liquidity and tradeability and the various things that pertain to other people going into those markets. There is a fairly captive audience for primary issuance by governments. Quite often, they have their state pension funds that are required to buy the bonds, they have reserve requirements for banks that are then offset by owning government bonds. Therefore, these things do not really move, they do not really trade. They may be repo-able, but it makes it very, very difficult for somebody else to access that market and to get in and out. The infrastructure has not yet been created in many of the jurisdictions that we are talking about as being potentially interesting. It is not just settlement, it is rules about the pricing of secondary trading, it is about how long a deal has to be blocked before you can actually get

Holger Kron: And things can change fast. Given people’s recent experiences, going forward they will be much more sensitive than before.

Paul Johnson: I think that is right. A country like South Africa is a good example: there has been an offshore market since ‘93, ‘94 and the market has been through panic, it has been through throes, it has been through the Argentina crisis, where government bonds yields doubled in a day. It was a pretty nasty market, but it recovered because of the underlying infrastructure. It is very difficult to pick the next South Africa market, particularly if you are constrained to Africa.

Isabelle Laurent: One thing we have not focused on is convertible versus non- convertible currencies, particularly given the growth of retail investors in exotic currency markets. I think that is another aspect that is quite key: whether or not the currency is convertible, and how easy it is then to access pricing. The likelihood of a moratorium in a convertible currency is somewhat less than it

There is a fairly captive audience for primary issuance by governments. Quite often, they have their state pension funds that are required to buy the bonds, they have reserve requirements for banks that are then offset by owning government bonds.

your money back on coupon dates. There are so many different factors that need to be considered as to whether or not a market actually is one which you can go in and out of, as well as swaps.

Paul Johnson: Because of the environment, people are doing a lot more due diligence as well. Eighteen months ago, there was a time when it was potentially very easy to access a country like Nigeria in terms of regulatory sign- off, limit sign-off, and that environment is definitely changing. But to look at these things now is much tougher.

I agree with the point that due

diligence is just going up and up and that infrastructure, swap markets and stable local banks are absolutely vital for sustainable markets.

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