Accessing Liquidity in the Emerging Markets: HSBC

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Hong Kong Shanghai Bank (HSBC) has come out with a report that explains the importance to its investors which also includes institutional investors about getting the local expertise to mitigate and neutralize the foreign exchange market risks and execution cost.  Return on asset are the most important thing that investors want and usually return on securities and or any other asset is higher in the developing of the emerging markets when compared with the developed markets or the matured markets. With such high returns in the emerging markets the difference in the yields are relatively wider in the different sector. The HSBC analysts have previously told that that investing in assets in the developing markets can yield attractive returns in the states. Although there re certain things investors have to watch out for before parking their money in any of the asset, the major area that needs to kept under check is the currency exchange risks that are the most unpredictable and volatile to forecast or predict. Failing to take notice of the issue can have grave consequences that may ruin n investor’s portfolio.

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According to the head of FX intermediary services at HSBC, the main hurdle or challenge while accessing these currencies is that, if not done properly it can lead to equity or bond settlement failures. The things that makes most of the users and investors take the risk and challenges is that, these markets are really good destination when it came to park the money as in terms of development of markets, sky is the limit. And as the industries are developing and are still is at a immature state, the security markets yield a high return for their investors. The emerging market currencies are of two types while some are freely accessible on par with the G10 counterparts while the other currencies are linked to an underlying equity or bond transaction with a FX leg of a trade merely becoming a by-product of the original transaction.

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These are common restriction that  exist between the currencies but there remains diverse specificities between pre-post trade condition, tax, and cash management implication among these emerging markets. These differences can prove to be a real challenge. There are certain conditions before the trading takes place in the currency markets in the emerging nation. One of the basic criteria is that the markets should have liquidity during the optimum period which helps in wider spread in the bid offer. The above statement was given by Robert Winmill, head of the institutional foreign exchange for Hong Kong and FX solutions for Asia pacific at HSBC. For American investors this can be challenging as they prefer to access the markets during local time. In this sense, timing is the most crucial and important factor, and as time difference are more than 24 hours, it even becomes harder to transact or to have any activity in the Indian financial markets for US investors.

One thing that the investor must have in their mind when they are investing in any security is that as they are putting in money into these assets that too are also absorbing the currency risk along with it. This is more applicable for fixed income investors and passive funds where if there is any delay between executing of the bond or the equity trade there is bound to have an impact on the FX execution which in turn can have significant impact on the economics a trade and increase tracking error versus a benchmark particularly when the markets are uncertain or are volatile. This was pointed out by Winmill.

Source: FX-Week


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