Volatility's Return Is a Lifeline for Becalmed Bankers: Gadfly

HONGKONG, BLOOMBERG -- There's a silver lining to this week's stock market rout: the likely end of Wall Street's Asia woes.

The return of volatility will help buoy trading income for investment banks from Goldman Sachs Group Inc. to Deutsche Bank AG, which have slimmed down their businesses in response to a prolonged period of calm.

Asia-Pacific revenue at investment banks dropped for a third year, to $25.7 billion in 2017 from $27.4 billion in 2016 and $29.6 billion in 2015, according to data from Coalition Development Ltd., a London-based analytics company. A global slump in fixed-income trading has weighed on fees, with the end of the China M&A boom delivering an added Asian drag.

What investment banks needed was good old-fashioned uncertainty, and this week's stock market tumble seems to have delivered that. FICC, or fixed income, currency and commodities trading, has typically been the main driver of banks' revenue. Placid or ever-rising markets are no good for this business, as the Coalition numbers show: FICC revenue fell to $22 billion for Western investment banks in the region, from $23.8 billion in 2016.

The equity rout and the jump in the Cboe Volatility Index -- better known as the VIX -- provide early signs that this year will be different. That's good news for hedge funds, which have been sidelined, and the investment banks like Goldman that rely on them.

While higher interest rates should spell the end of a boom in dollar bond sales, there are reasons for optimism. China shows few signs of easing up on its deleveraging campaign, which means onshore debt issuance will remain tough. As a result, Chinese issuers, especially property companies, will keep tapping the offshore market. Debt capital markets issuance in the region rose to a record last year and has regularly set highs since surpassing $100 billion in 2009.

Even for equities, emerging from Wall Street's biggest tumble in six years, all is not lost. While falling markets will drag down volumes, a wall of Chinese money has made its presence felt in Hong Kong in the past few years. There was record mainland buying of Hong Kong-listed stocks through the trading pipes connecting to the Shanghai and Shenzhen stock exchanges on Monday.

Chinese government crackdowns on wealth-management products and, most recently, bitcoin trading platforms, have narrowed the investment options available to the local population, increasing the allure of Hong Kong stocks. Investment banks that are capturing flows through the stock and bond connect programs have strong prospects even as the MiFID II regulations hurt their business.

There are some clouds. The clampdown on China's outbound M&A remains in place, though the type of purchases coveted by Beijing -- think semiconductor acquisitions and Belt and Road-related projects -- have a better chance of winning approval, provided they aren't blocked by overseas regulators.

But if the omens are correct, the familiar ritual of job cuts at Asian investment banking operations may finally be a thing of the past. Bankers could even dream of hefty bonuses.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.