Financial Times Europe - 13.11.2019

Wednesday13 November 2019 ★ FINANCIAL TIMES 19

MARKETS & INVESTING

P H I L I P STA F F O R D— LONDON

Nasdaq s to sell its commoditiesi
futures business to an exchange owned
byDeutsche Börse, nding a four-yeare
effort to break into energy markets
dominated by US rivalsCME Group
andIntercontinentalExchange.

EEX, controlled by the German
exchange, said it would pay an undis-
closed sum to buy the business, known
asNFX, which hosts a range of oil and
freight futures contracts.
Spearheaded by former Nasdaq chief
executiveBob Greifeldin 2015, NFX
aimed tohalve the cost of trading omes
of the biggest energy futures contracts.
Direct competition between futures
exchanges is rare, as different venues
tend to dominate in their chosen mar-
ket, but energy is an exception. CME
and ICE battle fiercely over market
share in highly active oil and gas con-
tracts such as WTI and Brent crude.
Peter Reitz, chief executive of EEX,
described the purchase as a “landmark
deal” for the exchange in its bid to break
into the US seaborne commodities and
freight trading markets. NFX’s biggest
contracts are in US power, natural gas

and oil.Goldman Sachs,JPMorgan

Chase,Morgan Stanley nda Virtu Finan-

cial, the proprietary trading firm, were

amongNFX’s early supporters. In spite

of incentives such as zero transaction

fees for the first nine months of opera-

tion, it was unable to garner extensive

volumes. Instead, traders tended to

stick with the deepest, most liquid mar-

kets where they can enter and exit with-

out moving prices.

NFX’s WTI contract traded 4m con-

tracts last year, down 63 per cent ear ony

year, according to the FIA, the futures

industry trade association.The compa-

rable contract on the CME raded 306mt

in 2018.

EEX, whose revenues rose last year by

21 per cent to €256.6m, aims to com-

plete the integration of US power con-

tracts on NFX to its US subsidiaryNodal

by the end of the year, and to transfer all

open positions in dry bulk freight by

next February. Other contracts will be

transferred in spring next year.

Adena Friedman, Nasdaq chief exec-

utive, hassharpened the exchange’s

focus n growing markets,o such as

financial data and technology, and

reduced the focus on underperforming

assetssuch as fixed income and com-

modity futures.

Earlier this week ICE said itwould

launchan exchange in Abu Dhabi to

host the first futures contract based on

the state oil company’s flagship Murban

crude.

The contract will set the price for the

country’s oil and marks a radical depar-

ture for the Abu Dhabi government,

which had apolicy of retroactively set-

ting monthly official selling prices for its

mainly Asian customer base.

Trading structures

Nasdaq agrees sale of commodities

futures business to German exchange

C O L BY S M I T H— NEW YORK

J U D E W E B B E R— MEXICO CITY

Investors are cooling on Mexico,

despite a series of interest rate cuts

aimed at boosting Latin America’s

second-biggesteconomy.

The central bank is expected totrim

rates or the third time in as many meet-f

ings, with markets anticipating a quar-

ter-point fall in the benchmark policy

rate to 7.5 per cent tomorrow.

But analysts and fund managers fear

the economy has ground to a halt.

Alongside a rise indrug cartel violence

and expectations the country’s debt will

be downgraded by credit rating agencies

next year, that is enough reason for

some to pull back.

“We see no reason to believe that

growth is going to pick up,” wrote ana-

lysts at Morgan Stanley last week. “Eco-

nomic policy uncertainty remains high

and security issues are becoming more

acute... although risks are well

known, we think that Mexico assets no

longer pay enough to compensate for

the increasing risk.”

Analysts at Citi predict Mexico’s econ-

omy will contract 0.1 per cent this year

and grow just 1 per cent next year, in the

wake of preliminary figures from the

country’s statistical institute that

showed it barely escaped arecession ni

the third quarter. Inflation has cooled to

the central bank’s target of 3 per cent.

Markets havepriced in more than a

full percentage point reduction in the

policy rate over the next year — with

some investors betting it could decline

as much as 1.75 percentage points.

But even with substantially lower

interest rates, Yerlan Syzdykov, global

head of emerging markets at Amundi

Asset Management, cautions the econ-

omy will fall far short of the 4 per cent

annual average growth President

Andrés Manuel López Obrador vowed

to reach by the end of his term in 2024.

“To get to 1.2 per cent growth that we

expect next year, you need to have those

cuts,” Mr Syzdykov said. “Is that spec-

tacular growth? No. They need that to

get off the ground.”

Mr López Obrador, whosaid the pre-

vious average 2 per cent growth rate was

insufficient, insisted Mexico’s economy

was doing well, thanks to state handouts

and higher pensions.

But with official figures remaining

lacklustre, Ed Al-Hussainy, a rates and

currencies analyst at asset manager

Columbia Threadneedle, warned that

Mr López Obrador may be tempted to

eschew his“diligent” approach to man-

aging the country’s finances and instead

embark on a spending spree. That is a

risk that will become all the more press-

ing, he said, as the midterm elections

approach in July 2021.

Gorky Urquieta, co-head of the

emerging markets debt team at asset

manager Neuberger Berman, aid: “It iss

pretty clear to us that the policy direc-

tion in Mexico is not what we want to

see. It just might be that for the next five

years it is the same story in Mexico,

where we don’t see any significantly

positive developments and the econ-

omy just bumps along. The scenario

where Mexico grows 3 to 4 per cent is

nowhere to be seen.”

Cross asset

Interest rate cuts fail to calm investor

fears over Mexico’s economic future

‘We think that Mexico

assets no longer pay

enough to compensate

for the increasing risk’

Nasdaq has reduced its focus on

fixed income and commodity futures

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H U D S O N LO C K E T T —HONG KONG

New debt and equity offerings often
draw a crowd. But when investors last
month placed more than $1tn worth of
orders for a convertible bond issued by
Shanghai Pudong evelopment Bank,D
about 140 times the$7bn aised, it wasr
enough to shock even the most sea-
soned China investor.
That $1tn is almost as large as the
market capitalisation of Apple or
Microsoft.
“It was a ridiculous amount,” said
Gerry Alfonso, head of research at Shen-
wan Hongyuan Securities in Shanghai.
As so often with runaway deals, the
overbidding in part reflects quirks
in the way new debt and equity end up
in investors’ hands. But it also reflects
a surge in issuance of these equity-
linked instruments in China, a rise
helped by an unusual embrace of the
product by policymakers better known
for cracking down oninnovations to
ensure stability.
So far this year, China companies
have issued a record $40bnin converti-
ble bonds, up more than 80 per cent
from the full-year total in 2018, accord-
ing to Dealogic.
Convertible bonds typically carry a
lower coupon payment than normal
bonds, but they offer investors the right
to switch them for equity if a company’s
shares rise to a certain price.
For companies, convertibles offer
a way to raise money more cheaply

than by issuing regular debt, and

do not immediately dilute shareholder

equity.

Ronald Wan, chiefexecutiveat Part-

ners Capital in Hong Kong, said China

convertibles had become more attrac-

tive to investors thanks to this year’s

stock rally, while the government was

promoting the instruments as a way of

reining in financing done off balance

sheet r through a fragileo shadow bank-

ing ector.s

But Mr Wan cautioned that converti-

bles’ performance “depends on the

quality of the issuer”, with investors typ-

ically favouring large banks and big

blue-chip companies over small and

midsized issuers.

Mr Alfonso echoed that. He warned

that while large issuers such as Shanghai

Pudonghad seen ample liquidity in

their convertibles after listing, investors

in smaller issuers would face eavyh

losses in the event of a sell-off.

“The liquidity is bad, but there is

liquidity,” he said. “The thing is, the

price you’re going to get there is pretty

horrendous.”

China’s first domestic convertible

bond was issued inNovember1992, two

years after the Shanghai bourse opened.

The bond, which never converted to

stock, was the only onshore convertible

issued for more than half a decade.

Today’s market is different, as China

convertibles carry special features that

set them apart from those in the US or

Europe. For one, conversion levels can

be reset after a bond is issued,increas-

ing the chances it will switch into stock.

Convertiblestend to be looked on

favourably by regulators because they

are treated as debt until conversion,

meaning investors have a better chance

than equity shareholders of getting

some form of repayment if the company

goes bust.

China companies are normally

required to wait at least 18 months

between offerings of shares, which

makes convertibles a useful way of gain-

ing access to new funds quickly.

“The process of [convertibles]

approval still takes time — half a year or

so — but it’s faster than an IPO or sec-

ondary offering,” said Yulia Wan, a sen-

ior analyst at Moody’s in Shanghai.

Ms Wan said that while the floor for

conversion prices at issuance was deter-

mined by criteria including average

trading price, it could be lowered if the

shares traded well below the initial level

for long enough.

Shesaid that because convertibles

usually had a maturity of five to six

years, a company’s shares had plenty of

time to rise high enough for conversion.

The convertibles’ equity-like features

mean they offer higher returns to inves-

tors than regular debt. But that alone

does not explain the largesubscriptions

common to the local market.

Mr Alfonso aid some of the rush wass

down to scarcity. Because existing

shareholderswere entitled to a large

chunk of any convertible bond thatwas

issued, the number of lots a company

could offer more broadlywas limited.

In the open market, the highest bids

win uto , but buyers know that they will

get only a fraction of what they request.

And because no money is required up

front to make an offer, there is no reason

not to bid as much as possible to maxim-

ise the odds of a successful purchase.

“You put up as much as you can and

hope for the best,” Mr Alfonso said.

Before regulators banned buyers

from bidding through multiple accounts

in March, it was not unusual for con-

vertibles to be even more heavilysub-

scribed. Prior to Shanghai Pudong’s lat-

est convertible, the largest issuance on

record of nearly $6bn, fromChina Citic

Bank, was about 5,500 timessub-

scribed, according to local media.

Orders of $1tn for Shanghai

Pudong Development Bank

debt branded ‘ridiculous’

Beijing is

pushing the

instruments

as a way of

reining in

financing

off balance

sheetor

through

the shadow

banking

sector

China groups

have issued

$40bn of the

bonds so far this

year, up more

than 80% on

the full-year

total for 2018

Alamy

Fixed income. idding rushB

China policymakers look favourably

on surge in convertibles issuance

L AU R E N C E F L E TC H E R— LONDON

An ex-trader at hedge fundEdoma Part-

ners s launching ai fund focusing

on responsible investments, the latest

sign that a sector known for its

single-minded focus on making money

is turning its attention to ethical

investing.

Quentin Dumortier, whoserved as a

captain in the French special forces

before switching careers to become a

hedge fund manager, has launched

hedge fund firmAtlas Global Investors

in London.

Mr Dumortier plans to filter stocks

based on strong or weak performance

in categories such as water conserva-

tion, clean mobility, and financial

inclusion. He will then select a basket of

stocks to back from the strong perform-

ers and a basket of stocks to bet against

from the laggards.

The launch of Atlas, which has not

previously been reported, is among the

first examples of a hedge fund focused

solely on responsible investing, and

comes as some of the biggest names in

the industry turn to theenvironmental,

social and governance ector in searchs

of returns.

Caxton Associates, one of theoldest

hedge funds, in July told investors

that “ESG is now centre stage for us in

active investment decision-making in

several areas”.

Man Group, thebiggest listed hedge

fund firm,says it has discovered a “fac-

tor” hat can identify stocks with strongt

or improving ESG characteristics likely

to beat the market.

However, Atlas’s launch comes at a

tough time for start-ups, with investors

on track to pull money from the $3.2tn

hedge fund industry for the third calen-

dar year of the past four.

Nearly 400 hedge funds pulled down

their shutters in the first half of this

year, compared with 289 launches,

according to data group HFR.

That closure-to-launch ratio is

running near its highest level since

the depths of the credit crisis in 2008.

A few new funds are attracting inves-

tor capital, however. Earlier this month

the Financial Times revealed that

Michele Gesualdi, former chief invest-

ment officer atKairos Investment Man-

agement, had raised more than $1bn orf

an alternative investments firm.

Mr Dumortier’s fund will use Califor-

nia-based data firmTruevalue Labs ot

rank stocksbased on their ESG charac-

teristics and use natural language

processing to read press articles and

company filings to gauge whether firms

are starting to perform better or worse

in these areas.

A panel of industry experts willsift

through the stocks before Mr Dumortier

selects his long and short portfolios.

Asset management

Dumortier

goes into

battle for

responsible

investing

The former captain in

the French special forces

was at Edoma before

launching Atlas Global

Chinese convertible returns are closer to stocks than bonds

Source: Bloomberg

Rebased











Jan  Nov



CSI  index

Bloomberg Barclays China Aggregate bond index

S&P China Convertible Bond index

NOVEMBER 13 2019 Section:Markets Time: 12/11/2019- 18:21 User:jeremy.wright Page Name:MARKETS1, Part,Page,Edition:EUR, 19, 1