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Asian markets will adapt — and prosper

03 Jan 2012

Forget the Mayan predictions, 2012 is not going to be the end of the world. Asian investors in particular have a lot to be optimistic about. But as the Asia Pacific region adjusts to changing economic conditions in other parts of the world, bond investors and issuers alike will have to change too.

Few investors can afford to be overly bullish about the coming year. Asian market participants know that each new plot twist in the European saga can slam Asia’s credit markets shut, and fund managers across the board are cautious about 2012, and what might happen next.

But despite the potential for doom and gloom, Asia still has a lot to offer those on both sides of the capital markets, especially if one takes a realistic look at the year. The riskier credits may not be able to find demand, and markets that have hitherto proven cheap sources of funding will almost certainly become more expensive. But debt and equity will be available for healthy credits.

The dollar funding markets will continue to be sporadic for high yield issuers in the first quarter of 2012, and maybe for longer. Most fund managers simply do not have the appetite to take on risk in uncharted sectors — or even those sectors, like the Chinese property space, that have been mapped and have revealed themselves to be full of dangers.

But investment grade issuers, and sovereigns of all stripes, will be able to find good demand from investors when offering bonds that are big enough to maintain some secondary liquidity.

After all, investors still have plenty to be optimistic about when they take a broad look at the economic outlook for Asia.

Sure, the region will struggle to maintain the pace of growth investors and policymakers have gotten used to over the last few years. China is the leading export destination for almost every country in Asia, and policy officials in the country are preparing themselves for tougher times ahead.

But while China’s economic growth is slowing down, it is still likely to remain at a rate that officials in any other country would jump at. Moody’s economists predict GDP growth of around 8.7% throughout the year. That’s not a bad number, as far as contractions go, and the rest of Asia’s reliance on demand from the fast-rising superpower should not yet be seen as a weakness.

The changing situation in China could damage one market that got a lot of attention in 2011 — CNH. While growth on the mainland is still rapid by global standards, the risk of economic contraction was big enough to convince the central bank to cut rates last year, and economists think they will continue to do so in 2012. That will make the offshore renminbi market less attractive to mainland-based issuers.

One of the key drivers of offshore renminbi issuance over the last year and a half has been the big discrepancy between the renminbi borrowing rates companies could achieve in Hong Kong, and the much higher levels they had to pay in China’s domestic debt markets. But growing risk-aversion near the end of 2011 pushed up the cost of funding in the offshore renminbi market, and PBOC rate cuts are now pushing mainland rates in the opposite direction.

Funding officials, bankers and investors are going to have to respond to this — and other changes in market dynamics — over the coming year. But as some markets might zig while others zag, and some issuers might have an easier time of it than others, this is still a great time to be a participant in Asia’s capital markets. Don’t believe us? Just look at the alternatives. Flight to Paris or Frankfurt, anyone?

03 Jan 2012