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Accessing emerging and frontier markets synthetically
11 July 2013
Market participants outlined various ways to gain synthetic exposure
Dan Katz, managing director of Bank of America Merrill Lynch introduced the Trading and Market Update panel at the Global Investor/ISF Synthetic Finance Summit in London. He began by explaining that there were a number of different synthetic products that can be used to access a variety of different emerging and frontier market countries.
These can include listed products like exchange traded funds, P-notes and various versions of synthetics, such as certificates, warrants, swaps and futures. Katz noted that asset under management have grown exponentially for the MSCI Emerging Markets futures since the introduction of futures contracts roughly 18 months ago.
However, he stated that “it can be very difficult to access those [emerging and frontier market] countries” in a timely manner and also be costly to do so locally because of the need to have local accounts in India and qualified investor status in China, for example. “Or it may be from a tax perspective more expensive to invest locally as is the case with certain investors in Brazil,” he added.
Hugh Evans, global head of access products at HSBC, spoke at length about interest in China. “China is pivotal as far as the emerging markets space is concerned,” he said, highlighting the fact that China was beginning to experience slowing growth prospects, the currency is no longer a one-way bet and that bank viability had also been brought into question.
“What we are seeing now is actually some sales of exposure within China, which was not the trend of the past….and huge demand for quota, more demand for quota than the authorities are putting out,” he said.
He noted that Hang Seng Investment Management Limited had been approved by the China Securities Regulatory Commission to obtain renminbi qualified foreign institutional investor (RQFII) qualifications. Largely, he added, RQFII status had been given to Chinese firms and the regulator has not previously targeted Hong Kong-based or international players.
“Now that has changed and approved RQFII quotas for non-Chinese firms and I expect that trend to continue,” he said. “Futures are opening up more and becoming more international from a regulatory point of view.”
Simon Luhr, managing partner and CEO of Finex Capital Management noted that “regulations in the emerging markets take a long time to develop” and many regulators are scared of short selling, the collapse of stock markets and price falls. However, he stressed the importance of short selling which he believes bring in liquidity and encourages price discovery.
Other countries in focus were India, Brazil, UAE, Qatar and Saudi Arabia. Katz added that the frontier markets had been experiencing rising demand in the last 18 months and that there is “a lot of excitement about Africa” but “there was a difficulty in gaining access and liquidity”.
Evans added that sub-Saharan Africa was not yet over-ramped and still had some potential, and viewed the region “as probably the next Middle East for the next five years”.