Quantitative easing still felt in bond markets
Jocelyn Wong : Asian investors like infrastructure and utility opportunities. Jeremy Piper
This content is sponsored by ANZ.
A wave of troubling economic news out of the United States, China and Europe coupled with the never-ending Brexit problems in the United Kingdom were among the key drivers of the global bond market rally in the March quarter.
At the same time, the US Federal Reserve has decided to halt its tightening policy which has prompted central banks around the world to start hinting at interest rate cuts as they try not to second-guess the Fed.
Yet while there is a degree of pessimism flowing through global markets, the decade-long post-GFC sugar hit of quantitative easing is still affecting global liquidity.
A good example is in Asia where Australian issuers are still able to access a large pool of liquidity across the board.
ANZ’s Institutional Banking group executive Mark Whelan said this is following a volatile year for credit markets marked by geopolitical shocks and heightened tensions.
“Asian liquidity is expected to continue to develop further over time and offer an attractive liquidity pool that offers diversification for Australian issuers.
He said Asia is an important and expanding source of liquidity for Australian customers.
Part of the reason Australian issuers are tapping Asian markets is the local market still lacks a lot of corporate issuance, according to ANZ’s debt syndicate director, Jocelyn Wong.
“Our market is still very heavily focused in terms of financial issuers such as the four major banks, regional banks, or some of the offshore issuers ranging from European to US issuers,” she said.
Spoilt for choice
Speaking at the recent Rise of Asian Liquidity roundtable co-hosted by The Australian Financial Review and ANZ, Wong said a key reason the local market lacks a lot of corporate issuance is we are spoilt for choice.
“There is the domestic bank market that has always been very supportive as well as the US Private Placement market that has always been very reliable in terms of tenor.
''The Asian banks have also come in and now there's the US dollar Reg S market [US dollar bonds not tied to US institutions].”
As for what interests Asian investors in Australian corporates, Wong says investors like our infrastructure and the utility opportunities because we are a little more regulated and offer real stability.
Beyond infrastructure and utility players, investors are looking at other sectors, which was well illustrated by Virgin Australia’s recent bond issuance for which ANZ was the joint lead manager.
The deal attracted more than 50 investors with a good distribution across Australian and Asian investors with a final book size of over $320 million.
Fellow roundtable participant and ANZ Markets head of credit strategy and research Owen Gallimore said even Australian property companies look good to regional investors, especially to China, because “the gearing levels of an Australian property company tend to be significantly lower than what we are used to in Asia.
Ahead of the curve
“You can see net gearing as low as 10 to 20 per cent, which suggests management clearly are ahead of the curve and well placed to deal with any short-term downturn,” Gallimore said.
“In terms of the financials, Australian banks tend to be the most capitalised in the world. For sure, there are headwinds as there always are in markets, but the investor base is very confident and comfortable that Australian issuers are positioned for any short-term turbulence.”
Another sector proving popular with investors is education, where for example the University of Sydney recently issued a 25-year $200 million bond and the investors were predominantly South Korean life insurance companies.
According to University of Sydney treasurer Laurie Zanella, various investor groups visited the university and had a look around and could see there was a long-term commitment to an infrastructure program over 25 to 30 years.
“They obviously liked our credit and once we kind of pushed the button to go, it was pretty quick. It was pretty seamless from our side.”
Pacific National’s head of treasury and financial control, Ben Nolan, who was also present at the roundtable; said the rail infrastructure company was looking to diversify from traditional 144A bonds and decided to tap regional markets through a 10-year Reg S-only deal.
“I think the investor base really understood us and we certainly saw it as diversification by breaking away from traditional 144A bonds. It opened up another market for us to tap into,” Nolan said.
Red flags
As for any red flags for investors, Zanella acknowledged he gets plenty of questions about Australia’s economy and political stability because we have been through a few prime ministers but they generally understand the Australian economy’s fundamentals are sound.
“They ask about the headlines which we can explain although, obviously in the university sector, there’s a worry about our reliance on overseas students because the majority of universities have quite a large percentage of Chinese students. Their concern is what happens if that tap gets turned off?
“You need to explain that you can still survive without those China students.”
As for whether Asian liquidity is here to stay, ANZ Global’s head of capital markets, Jimmy Choi, said the biggest risk would be a macroeconomic event in China, yet while we have seen hints of that in the last year, liquidity has come back strong this year.
He also cited interest rate movements and a grand escalation in geopolitical tensions which can never be ruled out.
And while there is some belief that China’s domination of the Asian market affects every other market, Mr Nolan said he does not see a China-led Asian market as a “red flag for us as a corporate”.
“What we're seeing is an investor base that understands the Australian landscape and is willing to purchase Australian corporates. You're seeing a lot of demand out of Singapore and Hong Kong, and so it's not necessarily a China-led story from where it's being purchased.”