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SmartBrief interview: IACPM Chairman Derek Saunders

4 min read

Modern Money

With an eye on what lies ahead for the industry, SmartBrief editor Sean McMahon conducted an e-mail interview with International Association of Credit Portfolio Managers Chairman Derek Saunders. Saunders is the global head of portfolio management at HSBC Holdings, and he shared his insight. This interview has been edited for clarity.

What are some of the trends you see developing in international credit markets in the next year? How do you see credit-portfolio managers responding to these changes?

CPM is extremely well positioned to be able to respond to the challenges of the environment. The financial-services sector is generally experiencing increased costs — a trend that is likely to continue as the new regulatory frameworks are progressively implemented. The cost of credit and the cost of funding are two key areas being affected for many of our members. CPM is, though, at the center of much of the decision making, whether at a transaction level or at the more holistic franchise level, and that is a strong position to be in. Increasingly, CPM has senior management’s attention; our members are able to deliver sophisticated analysis and informed views that help with the strategic decisions that need to be made in the medium term. This is the sort of value add that is key in an environment where there is an increasing polarization of our markets.

We’ve seen credit issues surface for countries worldwide. Looking ahead to 2012, what regions or countries give you confidence? Any that make you cautious?

Although corporate balance sheets are generally perceived to be strong, history demonstrates that default levels increase as a financial downturn normalizes — this is an area where we need to remain diligent in the medium term. Volatility around the ongoing eurozone situation remains, and full resolution will take years to work through — there is no quick fix — although many commentators are of the opinion that a solution will be found. Add to this a global geographic rebalancing, and there is plenty to keep portfolio managers busy in 2012.

Other areas to watch include ongoing developments in the Middle East, whether it be post-Arab Spring politics, restrictions in the flow of oil or the sustainability of growth in some emerging markets that have been particularly buoyant recently. The stronger geographies remain Asia and China, with the U.S. still displaying the “green shoots” of a recovery. There are many who would point out that there is no recent precedent for an ongoing dislocation between the European and U.S. markets. Given the long-term nature of a eurozone recovery, I, for one, hope that this turns out to be different.

The interbank-lending markets saw strain in 2011, particularly in Europe. How do you see that situation evolving in 2012?

Given the current intervention and the importance of liquidity in the wider market, steps are likely to be taken to ensure that liquidity does not become a material issue in 2012 — this does, though, assume that the somewhat binary position in Europe remains on the path of a managed solution, as most anticipate. It would not be unreasonable to have expected to see interbank-lending rates tighten more than they have after the recent European Central Bank support. But the ECB action has effectively “underwritten the wall of fear” in Europe, and this is a positive development. Confidence is key.

How do you see the various directives of Basel III taking shape in 2012?

The new regulatory framework is already affecting the wider market and will progressively do so throughout 2012. The question is: Will implementation continue at the pace indicated in light of the ability of the underlying real economy to absorb the impact? Will a broadly level playing field materialize as the U.S. proceeds with its stated implementation strategy? Time will tell. On proposed changes to the funding and liquidity rules, which have been set out at a high level, however, there are some material details still to be fine-tuned — hence the consultation process under way. The outcome of this could be significant.

Given the above conditions, how will the IACPM evolve to best serve its members?

IACPM has grown rapidly to 90 member firms in short order, and the internal and the external environment for our institutions is very different in today’s world. In recognition of this, the board has just completed a strategic review that will position IACPM for the medium term. It will enable us to focus on the core areas that are important to our members and prioritize resources accordingly. In addition to increased advocacy around important regulatory issues, there are a number of additional exciting initiatives that will be announced at our next general meeting. I look forward to discussing these with you all in Madrid.