Which areas and types of trades have risen or fallen over the last year?
We continue to see heightened interest from borrowers for equity securities in certain sectors. The key sectors where we see heightened demand typically are alternative energy, financials and exchange-traded funds (ETFs).
The general theme in Asia has been the directional trading interest that is associated with an anticipated slowdown in the Chinese economy as perceptions of a possible ‘hard landing’ emerged in mid-2011. This manifested in Hong Kong, particularly for Chinese H-shares, which gave investors exposure to mainland companies given a restriction of offshore investor access to A-shares. Popular sectors included autos, construction, commodities, gaming, luxury goods, property and retail. Within the emerging market space, directional trading strategies have also dominated demand in markets such as South Korea and Taiwan, particularly for technology stocks as broader concerns of growth have led to a negative outlook for exporters.
In Europe, a key factor driving hedge fund demand has been the increase in capital raising that has taken place over the last one to two years. The introduction of new legislation requiring financial institutions to hold higher levels of Tier 1 capital has resulted in wide spread capital raising, especially within Europe’s peripheral banking sectors as firms have looked to strengthen their balance sheets. This has typically been achieved through the issuance of new share capital at a discounted price, usually via a rights issue. Natural price arbitrage opportunities created by these events has driven demand from hedge funds and elevated spreads. Europe has also seen a steady reduction in alternative energy tax credits, which has created short demand for alternative energy companies such as solar and wind.
In the Americas, the Brazilian market continues to generate interest, but some unique aspects of the market with respect to the central counterparty (CCP) model and collateral still have not led to many clients engaging in lending activities in Brazil for now.
How much or little uniformity is there between the Americas, Europe and Asia within the securities lending markets?
Overall, there is uniformity in the general process of lending across these markets. The continued success of trading platforms such as the most recently introduced Equilend Bondlend platform has increased standardisation of automation across the regions. However, each region obviously has significant nuances in terms of settlement, collateral preference and trading strategies. For example, the US remains high volume and collateral remains focused on accepting or pledging cash. In Europe, different forms of non-cash collateral continue to expand. In Asia, accepted collateral is also varied but perhaps less pertinent given the focus on high intrinsic value lending of emerging market equities.
What opportunities exist in the emerging markets?
Taiwan remains the most compelling of emerging markets in Asia from a revenue standpoint, and despite recent regulatory constraints, offers attractive spreads that are driven by a lack of supply. South Korea also continues to remain a very attractive market for participants, particularly for high frequency-type trading that is focused on smaller cap securities. However, a short-sale ban on financial securities continues to hamper growth. In Malaysia, recently amended securities lending rules have attracted lenders to the possibility of launching in an offshore market. Given the size of the Chinese market, we believe that this will continue to draw interest from offshore participants, although an offshore model appears to still be in development.
In Europe, Russia represents one of the most exciting new frontiers with compelling spread opportunities potentially available. Russia represents the largest and most active of the MSCI emerging markets, with more than $2 billion of liquidity being traded across the MICEX exchange each day.
Turkey is another compelling European emerging market from a securities lending revenue perspective, with robust hedge fund activity, which continues.
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