Souk of Marrakesh and a buyers’ market

April 20, 2009

What do the souk in Marrakesh and the global fixed income market have in common?

Price discovery, says Chris Iggo, chief investment officer of fixed income at AXA Investment Managers.

There are no fixed prices in the souk. In order to transact, one has to “discuss” the price with the trader, says Iggo. Unless you are very naive or just not very good at bargaining, the final price is always very much lower than the initial gambit.

When his son wanted a pair of training shoes, the trader — sensing an easy win — originally quoted 1,700 dirhams (£140). They eventually settled on a price of 200 dirhams (£8).

The concept of assymetric information is key here — what the trader knows but the passing customer doesn’t know is the cost structure of the goods on show.

Price discovery remains difficult in the corporate bond market as a result of the problem of asymmetric information. Bond prices are low because the bond holder does not know whether the issuer is going to repay the debt at par as scheduled or not.

“For the banks, the asymmetric information works in their favour as they are redeeming debt at a much lower price than they issued it at,” he says.

“Information is vital to valuing things. The more you know the better will be the valuation.”

The trainers proved not so much of a bargain. They fell apart after two games of football.

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