There’s Life for Bond Traders Amid the Carnage
(Bloomberg Opinion) -- Fixed-income traders, having a bad year? It may be time to beat a path to Asia.
As the business faces a secular decline in other parts of the world, the action is increasingly in the region. That trend should persist, as China and India widen access for foreign investors, improving markets attract funds from outside Asia, and relative inefficiencies create opportunities for nimble traders.
Asia-Pacific is now a bigger share of global investment banks’ trading business than it’s ever been, making up as much as 23 percent of total markets revenue last year, compared with 16 percent in 2009, according to data from Coalition Development Ltd., a London-based analytics company. Institutional investors are returning to the region amid a bull run in Chinese equities and surging bond sales by the nation’s real estate developers.
The shift is happening as the global picture remains tough. To illustrate: JPMorgan Chase & Co. co-President Daniel Pinto said last week that trading revenue is likely to drop by a high-teens percentage in the first quarter from a year earlier. The warning prompted some Wall Street analysts to reevaluate their assumptions for other banks.
Trading of fixed-income, currencies and commodities, or FICC, is the largest revenue-earning division for global banks in Asia. Equities trading has good years when markets boom, but deals (IPO and bond underwriting, plus advising on M&A deals) generally account for only about 15 percent to 16 percent of investment-banking revenue, while FICC makes up 45 percent to 46 percent.
FICC has been in decline around the world since the financial crisis. Global revenues fell 12 percent last year, according to Coalition, which gauges data from the world’s top 12 investment banks. In Asia-Pacific including Japan, though, the drop was just 4 percent. That’s pushed up the region’s share of global FICC revenues to 21 percent last year, from 14 percent in 2009. (Asia’s share of global equities revenue has also risen, to 25 percent from 24 percent in 2009.)
There are several reasons why the Asian FICC business has proved more resilient. Automation has been gaining pace in developed bond markets, compressing margins and reducing the need for human traders. In Asia, more trades are carried out over-the-counter, which are difficult to mechanize. In contrast with the U.S. and the euro zone, the region also has many different currency markets, some of which are relatively opaque and illiquid. That creates trading opportunities for banks.
In addition, Chinese President Xi Jinping’s Belt and Road Initiative has helped spur increased intra-Asian commerce, a boon for trade-focused lenders such as HSBC Holdings Plc and Citigroup Inc. Banks can make money from hedging and risk management for Chinese corporate giants, even on such mundane tasks as converting yuan to pay salaries of overseas employees.
Meanwhile, Chinese equities have rebounded from a bear market. More important for both stock and FICC trading, though, is the fact that the market is opening further to foreign investors. More than $46 billion is poised to pour into Chinese equities from funds that track the MSCI emerging markets gauge, according to Bloomberg estimates. India is also offering unprecedented access to its bond markets.
To be sure, there are challenges. Europe’s MiFID II regulations, which require banks to charge for research separately from other services, is affecting cash equities trading. Malayan Banking Bhd., Malaysia’s biggest lender, shut its Hong Kong and China equity research operation earlier this year. China’s banks, meanwhile, are winning mandates as underwriters of hot Hong Kong IPOs, though they aren’t yet challenging global securities firms in FICC trading overseas.
What this all means is that Wall Street and European banks won’t be cutting as many jobs in Asia. Firms such as Goldman Sachs and former FICC powerhouse Deutsche Bank AG are retreating globally from the fixed-income trading business. Other regions are likely to bear the brunt of the reductions, though. Globally, the world’s top 12 investment banks had 17,300 employees trading bonds, currencies and commodities last year, down almost a fifth from 21,300 in 2013.
There may be no hiring boom coming, but at least the business isn’t dying in Asia.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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