2010 Summer Forum - June 24, 2010 2010 Summer Forum - June 24, 2010
2010 Summer Forum - June 24, 2010

Greek Crisis Weighs on London Summer Forum

EMTA's 13th Annual Summer Forum took place in London on Thursday, June 24, 2010.  200 EM market participants attended the event, which was hosted by Bank of America Merrill Lynch.  Discussion of the Eurozone crisis continued to weigh heavily on the discussion, as EM fundamentals remained strong.

BofA Merrill Lynch Research's Danny Tenengauzer moderated the event's first panel discussion, emphasizing the themes of performance and contagion.  He also discussed the potential for new issuance, describing the need to develop local debt markets as "probably the single most important issue to watch."

Jerome Booth (Ashmore Investment Management) noted that as interest rates in the G-10 would not be hiked in the near-term, there was potentially an attractive market for issuers, and that, medium-term, there would be plenty of demand for new issues.  He noted that a longer-term development is the diversification of Central Bank reserves away from the US Dollar, which will add demand for the larger EM currencies albeit not overnight. 

Tenengauzer asked for comments on redemptions, one of the frequent topics of 2008-09 events.  Booth responded that, post-Lehman crisis, Ashmore’s long-only, institutional funds have witnessed inflows.  Booth emphasized a change in perception of developed countries has occurred.  "It is fiction that there is a risk-free asset; EM is risky but G-10 is riskier," he asserted.  Central Banks are now large investors in EM, and these large amounts of inflows are sticky.  In addition, the investor base has broadened with both corporate treasurers and insurance companies also now investing in EM assets. 

David Dowsett (BlueBay Asset Management) asserted that EM has continued to perform well, despite occasional contagion and mini-sell-offs from developed country events.  Dowsett expected this trend to continue.  He added that for the 2H of 2010, investors will continue to discriminate between EM assets.  "In 2008, everything went down; in 2009, everything went up; but in 2010 there will continue to be more differentiation between credits."

Dowsett observed that “now I encounter the least resistance I have ever heard [to the EM story].”  However, he believed that the acceptance of EM as an attractive asset class was not yet matched by the amount of EM assets held by pension plans etc., implying there is still much potential for EM.  “We could still be at the early stages of inflows to EM; maybe in a two or three years all value will be squeezed out, but I don’t think we are there yet.”

Alex Garrard (BTG Pactual Asset Management and a new EMTA Board Director) and ING Investment Management’s Rob Drijkoningen concurred that institutional investors remain under-allocated in EM.  Garrard added that local currency exposure still makes sense as a diversification tool.  Drijkoningen viewed local markets as somewhat prone to herd behavior, and which could warrant a more strategic view but could provide great opportunities.

Booth argued that in the current global economic climate, EM countries are in a good position to grab market share from their developed country counterparts, and increasingly they will be price setters.  He acknowledged that pension funds are prone to move in herds, but rejected the suggestion that EM was in a bubble.  “Bubbles are in the developed world,” he countered.  Looking more broadly at the global economy, he noted that we are heading toward a multi-currency reserve system.

The panel discussed China, and its efforts to promote a more domestic-consumption driven economy, rather than an export-driven economy.  Dowsett described China as the hardest country to analyze, but one whose importance to the global economy cannot be understated given its contribution to global growth and boost to commodity prices. “Headlines in China,” he said “could end up being big problems here.”

Discussing concerns over the Eurozone, Dowsett voiced his opinion that Greece will restructure sovereign debt within twelve months but would not abandon the euro.  Booth and Garrard largely agreed, with Booth commenting that there was “massive cognitive dissonance” about the pricing of Greek bonds; “the level of denial is fascinating.”  Dowsett and Garrard both thought that the EU’s SPV would eventually be activated for the Spanish banks.

Turning to favored trades, Drijkoningen spoke positively on Russian and Brazilian quasi-sovereigns, corporates and financials as well as Qatar, Argentina, Ukraine, and Asian currencies.  Garrard labeled Argentine GDP warrants as cheap; and advised that a local restructuring will unleash value in Kazakh banks.  He also recommended Chinese property, the MXP and TRL.

Dowsett seconded the Argy GDP warrant recommendation, and recommended shorting Jamaican bonds.  Booth suggested India and South Korea, Venezuelan external debt and infrastructure stories.  Finally, moderator Tenengauzer included Poland and Mexico among his trade recommendations. 

Brett Diment (Aberdeen Asset Management) moderated the event’s panel of sell-side speakers.  Diment initiated the discussion by polling panelists for their 2H 2010 forecasts.

Barclay Capital’s Matt Vogel agreed with earlier comments that G-10 interest rates would remain low for longer than previously expected.  He expected Asian currencies to outperform, and suggested recent price weakening made Russian paper attractive.  He also recommended Turkey as a long-term structural trade.

David Lubin (Citigroup) noted that his firm was now forecasting 800 bps of rate hikes in 21 EM countries, compared to a previous forecast of 1400 bps in hikes.  He expected EM currencies generally to gain strength in 2010.

Deutsche Bank’s Marc Balston asserted that the perception that the global crisis was a developed-country crisis would lead to additional EM inflows.  Balston also expressed his relatively positive view of the direction of EM sovereign spreads, although he expected corporate debt and FX to prove more potentially rewarding.

Michael Marrese (JPMorgan) calculated that, based on his firm’s house view on 10-year UST returns, the EMBI should return 4.2% for the rest of 2010.  Investors should buy select corporate issues for best performance rather than the corporate index, he advised.  He also acknowledged that JPMorgan’s house view did not include a Greek sovereign debt restructuring, in contrast to other Forum speakers.

Lubin was among those who predicted an eventual Greek restructuring.  The Latin debt crisis of the 1980s suggested that the speed of the resolution could depend on how quickly creditors were able to recognize losses.  In addition, past experiences also suggest that a sovereign which realizes default was inevitable has an incentive for “bad behavior” which would depress pricing of outstanding debt.

“I can’t see how Greece can avoid a restructuring,” echoed Balston.  He pointed out that as the IMF and EU gradually replace private investors as Greece’s creditors, the remaining private investors were likely to take a large hit if traditional seniority rules apply.

Panelists also discussed Chinese wage growth (an important indicator of China’s move to promote domestic consumption’s share of GDP, noted Balston) and the risks of capital controls in EM countries (Lubin noting that India, Peru, Chile, Russia and Israel meet the IMF’s conditions for when controls are an acceptable policy).

The London Summer Forum concluded with its traditional drinks and networking reception.