Investors are predicting deal flow in Asia’s capital markets will increase in the coming weeks, following Wednesday’s cut in US interest rates – but are divided about whether the surge is sustainable.
Asian capital markets recovered more ground last week on the back of the rate cuts.
Hong Kong’s Hang Seng Index gained 485 points on Friday to close at 26,241.02, while stock markets in Singapore, Thailand, Indonesia and India all gained at least 1%. The credit markets also strengthened, with the widely followed iTraxx index of high yield bonds opening 42 basis points (bp) tighter.
“The market is recovering from a doomsday scenario, and the perception that the Fed is moving towards a neutral stance is helping,” said Dilip Shahani, head of global research for Asia Pacific at HSBC in Hong Kong.
But he warned: “The rally will continue for around 10 days more as the huge fear premium is taken up, but then it will move sideways as people start focusing on macroeconomic data from the US.”
Appetite for Asian risk has been returning after the near-collapse of Bear Stearns in mid-March, and the region’s borrowers are beginning to return to the capital markets.
Korea Railroad Corp, the state-owned track manager, is set to sell a $300 million five year bond next week, while Truba Alam Manuggal Engineering, an Indonesian power contractor, is marketing a $300 million three-year bond.
Some frequent Asian borrowers are tipped to announce deals next week, including the Export-Import Bank of Korea, which held a series of investor presentations last week and is considering a big dollar-denominated deal.
“The tone of the market has been improving for the last few weeks, not necessarily because of the rate cut,” Joel Kim, head of Asian debt at ING Investment Management in Hong Kong, told Emerging Markets. “Part of the market is reading into this that the worst of the bad news is over, and appetite has improved.”
Debt investors welcomed Wednesday’s 25bp cut by the US Federal Reserve, which took US interest rates to 2%. Lower interest rates make the returns of fixed rate bonds look more attractive, and the Asian markets rallied after national holidays on May 1. Very few cash bonds changed hands, however, with most investors speculating on indices or in the credit default swap market.
The iTraxx Asian high yield index, which has become one of the most popular measures of risk appetite, performed well on Friday, closing 35bp tighter at 425bp.