Although the term “emerging markets” may still make some people wince at the memories of the 1997/1998 financial markets crises, Birgitte Jespersen, head of emerging markets for HSBC Bank plc and HSBC Bank USA in London and NY, believes that if you play your cards right, the rewards can be greater than the risks.
“The emerging markets business is volatile by nature, but if you live and breathe this business, you survive and prosper by avoiding situations where crisis decisions must be made,” she says. “The challenge in emerging markets is to avoid being forced to make decisions when crisis situations arise by having a strategic decision making process in place.”
Jespersen, 41, was initially hired by HSBC from Citibank five years ago to build a local currency business in London and NY. “Adding that piece was a natural complement to the FX services that the bank already provided in the G-11 currency products. The business encompassed FX, derivatives and local fixed income products. The art really was to take the local currency capability of the branches, combine it with product innovation and risk management, and take that to our established client base,” she says.
Jespersen was given additional responsibility for a broader emerging markets group, which now includes international fixed income, following the January merger with Republic National Bank of New York. Jespersen’s counterpart in New York, Abe Curdumi, was in charge of Republic’s emerging markets fixed income business, and now co-heads the business with her.
“The bank decided to try and create something bigger than the sum of the parts,” she says. “We already have a product base that works for institutional clients with market making and limited primary issuance, but we are now adding to that product range to focus on products that are of interest to Republic’s private client base. We want to expand the range of securities and primary-type underwriting that we are doing. But the real challenge will be to match what we do internationally with what the bank wants to do locally.”
A successful emerging markets strategy will combine products, she adds – FX with local currency derivatives, local currency fixed income and international debt. “Emerging markets covers every product in a financial system. Critical to success is keeping very close to the local market and the local financial system. That means actually going out there and getting to understand the culture,” says Jespersen.
“The business that I manage has changed and been redefined twice in the last five years, reflecting a combination of changes in both the market and within HSBC,” she says.
During 1996-97, there was increasing demand among investors for local currency assets, so HSBC built a structure to satisfy that, she explains. However, the business had to be redefined after the Russian GKO default.
“That event changed international markets’ perception of domestic debt. Previously, the market viewed domestic debt as good, or possibly better credit risk than international debt, because of the underlying assumption that governments could always print money rather than default,” she says. “But what happened with the policy directives of the World Bank and IMF was that an inflationary policy bias was no longer acceptable. Emerging markets suddenly had a lender of last resort who determined what was and was not acceptable. In a way, this removed a classical option for emerging markets – which was – if you can’t pay your debt, you can reduce its value through hyperinflation. So once the inflationary option is ruled out, you end up with one credit universe.”
As a result of the GKO default, the international appetite for local currency assets disappeared. This coincided with a general increase in local tax and regulatory initiatives aimed at building a domestic investor base, so HSBC restructured the local currency side of the business and increased its emphasis on local investors. “Successful development of a financial market is based on building a domestic savings pool. An international bank should add value to that domestic investor base by contributing its expertise to areas such as securities documentation and underwriting as well as research,” she says.
Jespersen believes the bank will be successful if it can align its international effort with the objectives of the Group’s local banking subsidiaries. “In many cases, the market views us as a local, rather than a foreign bank. The biggest challenge is changing the business as the market changes, which means resources have to be moved either geographically or in terms of emphasis,” she says.
“A lot of banks lost large amounts of money in the aftermath of the GKO default. As a result, they chose to close or significantly reduce emerging market activities, thereby losing a lot of expertise and skill. We’re fortunate not to have had to do that. We have actually been expanding – and very rapidly since 1998. HSBC has a control environment which suits this business very well because it doesn’t allow the risk to get too big,” she says.
By having a strategic decision making process in place, and not relying on crisis management, HSBC was able to weather the storm, she says. “In the late 1990s, people could see the reduction of revenue that was likely to follow the advent of the euro and viewed emerging markets as a substitute earnings pool. So they built up this business to a level of risk that was disproportionate to the revenue base. Whereas for HSBC, emerging markets has always been a core activity – so we had a measured approach to the expansion. Volatility of revenue is part and parcel of the business – but it is about the size and type of risk that you run and its timing in the emerging market business cycle. This must be chosen carefully and as part of a long-term plan, not as a revenue substitute,” says Jespersen.
“If the business is really guided by a genuine commitment to the client base and the expansion of that, chances are that you will have healthy development. But if replacement of revenue is the motivation – at what point do you stop taking risks?” she queries.
“Emerging markets is not a business where you can take a G-3 or G-7 skill base and transfer it,” she adds. “Emerging market products are as sophisticated, if not more so, than G-3 products. So it’s not about sophistication – it’s about product innovation. When there is a big cultural gap between the local and international markets, you must guide the product development and understand how to deal with the business in local market terms, not G-7 terms.”
Jespersen originally entered the financial markets in October 1982 when she joined the graduate training programme at Citibank in London. Being Danish, she was put into a treasury marketing role working with Scandinavian clients. After about a year, Citi transferred her to a minor currency trading desk as part of a three-month market making training programme.
The minor currency business was starting to take off at that time so, after just nine months, the desk became part of the interbank trading area. When asked who he wanted to assist him now that the business was expanding, her American manager insisted on “having that girl back”. “I think that if he wasn’t an American, he wouldn’t have insisted on me because it was unusual to have women traders in London back then,” she says. “When the American left, they looked at my numbers and couldn’t argue with them.”
So she built her career trading spot and forward South African rand back when gold was very volatile around the end of 1983. “After about a year, they wanted to move me back into sales, but I said ‘no, please look at the numbers’ and they agreed I could stay in trading,” she adds.
Later, Jespersen recalls being asked to trade major currencies but turned down the chance because she wanted to stay in the minors. “If a currency was too small to bother with, it would end up with me as the last stop. I always liked illiquidity. There’s something fun about being the last price in the world,” she says.
Jespersen was propelled into a senior management role early in her career. She moved to Hong Kong just as a large group of dealers left Citi in 1985 and she found herself managing a few staff as one of the more senior staff that remained.
Jespersen says she learned a lot about management during that four-year stint in Hong Kong. “In Asia, there is an emphasis on management by consensus – this means it takes a lot longer to arrive at a decision, but when you do reach one, you’ve spent so much time discussing the decision and the rationale behind it, that everyone knows where they belong in the process. So when it comes to distributing responsibilities, people would actually choose roles that suited their strengths because they could see where they fit into the bigger picture.”
HSBC has a very flexible approach to management, she adds. This flexibility is an important factor because otherwise, making the necessary shifts would have been difficult. “HSBC is deeply committed to emerging markets, and not deeply political. I’m very lucky to have had the benefit of that type of management – I’ve learned a lot and am still learning,” she says. “Emerging markets are truly fascinating – I’m very glad that I stayed with it.”
On a personal note, Jespersen enjoys travelling as well as cooking, art and music. Her latter interest is easily fulfilled – her twin sister is famed opera singer Annemarie Sand. Jespersen also says she spends a lot of time with her family, both in London and Denmark, and often stays at a family “summer cottage” by the beach in Denmark – which she says is a rather grand term for what it actually is. Personal goals for 2000 are passing her driving test and learning to sail. She adds that she used to do a lot of sports, but “middle age and bad knees have caught up with me”.